Verastem Oncology
Annual Report 2012

Plain-text annual report

Use these links to rapidly review the documentTable of Contents Consolidated Financial Statements ContentsTable of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549FORM 10-KCommission file number 001-35403Verastem, Inc.(Exact name of registrant as specified in its charter)Delaware(State or other jurisdiction ofincorporation or organization) 27-3269467(I.R.S. EmployerIdentification No.)215 First Street, Suite 440Cambridge, Massachusetts(Address of principal executiveoffices) 02142(Zip Code)Registrant's telephone number, including area code: (617) 252-9300 Securities registered pursuant to Section 12(b) of the Act:Title of each class Name of each exchange on whichregisteredCommon Stock, $0.0001 par value NASDAQ Global Market Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes  No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes  No(Mark One)  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2012oro TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to  Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.  Yes o No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for suchshorter period that the registrant was required to submit and post such files).  Yes o No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not becontained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K orany amendment to this Form 10-K. o Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Checkone): Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes  No Aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 29, 2012 was$89,675,000. The number of shares outstanding of the registrant's common stock as of February 28, 2013 was 21,152,465.DOCUMENTS INCORPORATED BY REFERENCE Portions of our definitive proxy statement to be delivered to stockholders in connection with the 2013 Annual Meeting of Stockholders areincorporated by reference into Part III of this Annual Report on Form 10-K. Large accelerated filer o Accelerated filer o Non-accelerated filer (Do not check if asmaller reporting company) Smaller reporting company oTable of ContentsTABLE OF CONTENTS2PART IItem 1. Business 4Item 1A. Risk Factors 42Item 1B. Unresolved Staff Comments 69Item 2. Properties 69Item 3. Legal Proceedings 69Item 4. Mine Safety Disclosures 69PART IIItem 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuers Purchases of EquitySecurities 70Item 6. Selected Financial Data 73Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 73Item 7A. Quantitative and Qualitative Disclosures About Market Risk 85Item 8. Financial Statements and Supplementary Data 85Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 85Item 9A. Controls and Procedures 85Item 9B. Other Information 86PART IIIItem 10. Directors, Executive Officers and Corporate Governance 87Item 11. Executive Compensation 87Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 87Item 13. Certain Relationships and Related Transactions, and Director Independence 87Item 14. Principal Accountant Fees and Services 87PART IVItem 15. Exhibits and Financial Statement Schedules 88SIGNATURES 89Table of ContentsFORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K contains forward-looking statements that involve substantial risks and uncertainties. All statements, other thanstatements of historical facts, contained in this Annual Report on Form 10-K, including statements regarding our strategy, future operations, futurefinancial position, future revenues, projected costs, prospects, plans and objectives of management, are forward looking statements. The words"anticipate," "believe," "estimate," "expect," "intend," "may," "plan," "predict," "project," "target," "potential," "will," "would," "could," "should,""continue" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain theseidentifying words. Forward-looking statements are not guarantees of future performance and our actual results could differ materially from the results discussed in theforward-looking statements. Factors that could cause actual results to differ materially from those in the forward-looking statements include, but are notlimited to, our ability to raise additional capital to support our clinical development program and other operations, our ability to develop products ofcommercial value and to identify, discover and obtain rights to additional potential product candidates, our ability to protect and maintain our intellectualproperty and the ability of our licensors to obtain and maintain patent protection for the technology or products that we license from them, the outcomeof research and development activities and the fact that the preclinical and clinical testing of our compounds may not be predictive of the success of laterclinical trials, our reliance on third-parties, competitive developments, the effect of current and future legislation and regulation and regulatory actions, aswell as other risks described in this Annual Report on Form 10-K and other filings with the Securities and Exchange Commission, or SEC. As a result of these and other factors, we may not actually achieve the plans, intentions or expectations disclosed in our forward-lookingstatements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potentialimpact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. We do not assume any obligation to update anyforward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.3Table of ContentsPART IItem 1. BusinessOVERVIEW We are a clinical biopharmaceutical company focused on discovering and developing drugs to treat cancer by the targeted killing of cancer stemcells. We also develop proprietary companion diagnostics. A cancer stem cell is a particularly aggressive type of tumor cell, resistant to conventionalcancer therapy, that we believe is an underlying cause of tumors, their recurrence and metastasis. We have proprietary technology to create a stablepopulation of cancer stem cells that we use to screen for and identify small molecule compounds that target cancer stem cells. Our most advancedprograms target the Focal Adhesion Kinase, or FAK, and the PI3K/mTOR signaling pathways. Our lead FAK inhibitor, VS-6063, is currently inPhase 1/1b testing in ovarian cancer and we expect to initiate a potentially pivotal trial of VS-6063 in mesothelioma midyear 2013 for which we haveapplied for orphan drug designation in both the United States and the European Union. In addition to VS-6063, our FAK inhibitor VS-4718 andPI3K/mTOR inhibitor VS-5584 are expected to enter Phase 1 clinical trials in patients with advanced cancers in the first and second half of 2013,respectively. Cancer is a group of diseases characterized by uncontrolled growth and spread of abnormal cells. The American Cancer Society estimated that inthe United States in 2011, approximately 1.6 million new cases of cancer would be diagnosed and nearly 600,000 people would die from the disease.Current treatments for cancer include surgery, radiation therapy, chemotherapy, hormone therapy and targeted therapy. According to estimates by theNational Institutes of Health, in the United States in 2010, the direct medical costs of cancer of all types exceeded $100 billion. IMS Health estimatesthat in the United States in 2010, approximately $22 billion was spent on drugs to treat cancer, representing the largest class of drug spending in theUnited States. Despite years of intensive research and clinical use, current treatments often fail to cure cancer. We believe that a key reason for the ultimate failure of many current therapies to achieve a durable clinical response is the presence of cancer stemcells, or CSCs, which are also sometimes referred to as tumor-initiating cells, within tumors. CSCs have been identified in many types of cancer,including mesothelioma, ovarian, breast, pancreatic, colon, brain, lung and leukemia. Following many cancer treatments, the tumor can remain with ahigh percentage of CSCs and become more aggressive and resistant to further treatment. In addition, patients who relapse often develop metastaticdisease in which the cancer spreads to other sites in the body. Tumor metastasis to critical organs is the cause of more than 90% of cancer deaths. Webelieve that it is the drug resistance and ability of CSCs to spread to other sites in the body that may be the root causes of these therapies failing.Accordingly, our mission is to develop drugs targeting CSCs that either in combination with other cancer treatments or alone can target all of the cellscomprising a tumor and, thus, create a durable clinical response. Our most advanced product candidates are VS-6063, VS-4718 and VS-5584. We are currently evaluating these compounds in preclinical and, inthe case of VS-6063, clinical studies as potential therapies for certain cancers, including mesothelioma, ovarian and breast. We believe that thesecompounds may be especially beneficial as therapeutics in aggressive cancers driven by CSCs that have a poorer prognosis and lower overall survivalrate than other types of cancer. An important element of our business strategy is the development and use of proprietary, companion diagnostics in connection with thedevelopment of our therapeutic drug candidates. We plan to use these diagnostics as part of a personalized medicine approach to identify patients that webelieve will benefit most from our therapies. We also believe that our diagnostics may be used to monitor patients' progress on therapy and aidphysicians' ongoing treatment decisions.4Table of ContentsOUR MANAGEMENT TEAM AND SCIENTIFIC CO-FOUNDERS AND ADVISORS Our experienced management team includes our Chairman, Chief Executive Officer and co-founder Christoph Westphal, M.D., Ph.D., ourPresident and Chief Operating Officer, Robert Forrester, our Chief Medical Officer, Joanna Horobin, M.B., Ch.B., our Vice President, Head ofResearch, Jonathan Pachter, Ph.D., and our Vice President, Head of Corporate Development and Diagnostics, Daniel Paterson. Dr. Westphal has been involved in founding a number of biotechnology companies as chief executive officer, including SirtrisPharmaceuticals, Inc., which was acquired by GlaxoSmithKline plc in 2008, as well as Alnylam Pharmaceuticals, Inc. and MomentaPharmaceuticals, Inc. Dr. Westphal also co-founded Alnara Pharmaceuticals, Inc., which was acquired by Eli Lilly and Co. in 2010. Mr. Forrester has been the chief executive officer, chief operating officer and chief financial officer of both private and public life sciencecompanies, including Forma Therapeutics, Inc., CombinatoRx, Inc., now Zalicus Inc., and Coley Pharmaceutical Group, Inc., which was acquired byPfizer Inc. in 2007. Dr. Horobin has 30 years of pharmaceutical drug development experience in senior development and executive roles in both public and privatecompanies. Dr. Pachter has over 20 years of experience in leading the discovery and translational research of small molecule and monoclonal antibodytherapeutics for the treatment of cancer, most recently as the Senior Director of Cancer Biology at OSI Pharmaceuticals Inc., which was acquired byAstellas Pharma Inc. in 2010. Mr. Paterson has over 20 years of experience in management roles at healthcare and biotechnology companies, includingas Chief Executive Officer and Chief Operating Officer, and specific expertise in oncology drug and diagnostic product development. Our scientific co-founders are recognized leaders in the field of cancer biology. Robert Weinberg, Ph.D., Founding Member of the WhiteheadInstitute and Professor of Biology at MIT, has played a key role in identifying the genetic basis of cancer. Dr. Weinberg discovered the first tumoroncogene, the first tumor suppressor gene, the role of a protein related to the cell surface receptor HER2 in preclinical studies and the mechanismsunderlying the formation of CSCs. Eric Lander, Ph.D., Founding Director of the Broad Institute, Professor of Biology at MIT and Professor ofSystems Biology at Harvard Medical School, played a central role in the Human Genome Project. Collaborative research in the labs of Dr. Lander andDr. Weinberg developed our proprietary technology for use in the identification of drugs targeting CSCs and a genetic expression signature, useful as abiomarker, to monitor the effect of treatment. Our management team is supported by our scientific advisory board comprised of leading academic and industry scientists. Our scientific advisoryboard consists of:5Scientific advisory board Robert Weinberg, Ph.D.Scientific co-founder and chair Founding Member of the Whitehead Institute forBiomedical Research, Professor of Biology at theMassachusetts Institute of Technology and recipient of the1997 National Medal of ScienceEric Lander, Ph.D.Scientific co-founder Founding Director of the Broad Institute, Professor ofBiology at the Massachusetts Institute of Technology andProfessor of Systems Biology at Harvard Medical SchoolJosé Baselga, M.D., Ph.D. Physician in Chief at Memorial Sloan Kettering CancerCenterTable of ContentsTHE PROBLEM The cancer death rate in the United States has only decreased modestly since the early 1990s. Cancer remains one of the world's most serioushealth problems and is the second most common cause of death in the United States after heart disease. The American Cancer Society estimated that inthe United States in 2011, approximately 1.6 million new cases of cancer would be diagnosed and nearly 600,000 people would die from the disease.According to estimates by the National Institutes of Health, in the United States in 2010, the direct medical cost of cancer of all types exceeded$100 billion and the cancer type responsible for the highest individual disease costs was breast cancer at $16.5 billion.6Scientific advisory board George Daley, M.D., Ph.D. Professor of Hematology and Oncology and Director ofthe Stem Cell Transplantation Program at Children'sHospital and Professor of Biological Chemistry andMolecular Pharmacology at Harvard Medical SchoolPeter Elliott, Ph.D. Former Senior Vice President and Head of Research andDevelopment of Sirtris Pharmaceuticals, Inc., former VicePresident of Pharmacology and Drug Development ofMillennium Pharmaceuticals, Inc. and co-developer ofVelcadeDaniel Haber, M.D., Ph.D. Director of the Massachusetts General Hospital CancerCenter and Professor of Medicine at Harvard MedicalSchoolRichard Sackler, M.D. Co-chairman, Purdue Pharma and Adjunct Professor ofGenetics at Rockefeller UniversityJoseph (Yossi) Schlessinger, Ph.D. Chairman and Professor in the Department ofPharmacology at Yale School of MedicinePhillip A. Sharp, Ph.D. Institute Professor at the David H. Koch Institute forIntegrative Cancer Research at the Massachusetts Instituteof Technology and recipient of the 1993 Nobel Prize inMedicine and PhysiologyRoger Tung, Ph.D. President and Chief Executive Officer of ConcertPharmaceuticals, Inc., former Vice President of DrugDiscovery of Vertex Pharmaceuticals, Inc. and co-inventor of Lexiva and AgeneraseChristopher Walsh, Ph.D. Hamilton Kuhn Professor in the Department of BiologicalChemistry and Molecular Pharmacology at HarvardMedical SchoolMax Wicha, M.D. Director, University of Michigan Comprehensive CancerCenter and Distinguished Professor of Oncology at theUniversity of MichiganEric Winer, M.D. Director of the Breast Oncology Center at the DanaFarber Cancer Institute and Professor of Medicine atHarvard Medical SchoolTable of ContentsThe following table sets forth the U.S. annual incidence, based on 2011 estimates from the American Cancer Society, and the prevalence, or the numberof people in the United States who have been previously diagnosed with cancer, based on 2010 estimates from the National Cancer Institute, for selectcancers in which CSCs have been implicated. For tumors that have not yet metastasized and remain localized to the site of original tumor formation, current treatments for cancer can be effectivein initially reducing tumor burden. However, for many forms of cancer, current treatments lack sufficient efficacy to achieve a durable clinical response.Following initial treatment, the tumor may recur at the same site or metastasize and spread to other sites in the body. The vast majority of patients whosuccumb to cancer are killed by tumors that have metastasized. This is illustrated by the information in the following table, which shows, according tothe National Cancer Institute's SEER Cancer Statistics Review, 2001-2007, the reduction in five-year survival rate for breast cancer patients based onthe stage of the disease at the time at which the disease is diagnosed. The percentage of patients diagnosed at each stage of disease, referred to as stagedistribution, is included below for comparative purposes. With the application of new technologies and key discoveries, we believe that we are now entering an era of cancer research characterized by amore sophisticated understanding of the biology of cancer. We believe that the discovery of CSCs and the role that they play in cancer development areimportant new insights that present the opportunity to develop more effective treatments.Cancer stem cells We believe that CSCs, which are sometimes referred to as tumor-initiating cells, are responsible for the initiation, metastasis and recurrence ofmany cancers. CSCs have the ability to:•move freely and proliferate without attachment to other cells or surfaces; •initiate a tumor; •self-renew; •produce other cancer cell types; and •resist many current cancer treatments. CSCs are often characterized by a distinctive set of biomarkers, which we believe may be a key to identifying patients with tumors that are likely torespond to therapies targeting CSCs.7Cancer type U.S. annual incidence U.S. prevalence Breast 230,480 2,645,621 Lung and bronchus 221,130 373,489 Colorectal 141,210 1,110,077 Leukemia 44,600 253,350 Pancreatic 44,030 34,657 Brain and other nervous system cancers 22,340 128,193 Breast cancer stage at diagnosis Stagedistribution(1) Five-year relativesurvival rate Localized (confined to primary site) 60% 98.6%Regional (spread to regional lymph nodes) 33% 83.8%Distant (cancer has metastasized) 5% 23.4%(1)2% of breast cancer cases were designated as unknown stage.Table of Contents CSCs may be more resistant to current cancer treatments than other types of cancer cells. Thus, as illustrated in the figure below, while currenttreatments may succeed at initially decreasing tumor burden, they may leave behind a population of CSCs that can regenerate tumors. Therefore, thepresence of a mixture of CSCs and other types of cancer cells within a tumor may necessitate a therapeutic approach combining drugs that can kill bothcell populations. The need to target CSCs may apply across the treatment of a broad range of cancers. CSCs have been isolated and characterized from many typesof cancer, including mesothelioma, ovarian, breast, pancreatic, colon, brain, lung and leukemia. The CSCs isolated from each of these tumor types havebeen found to confer greater tumor-forming capability when transplanted into mice than other types of cancer cells from the same tumor. Several specific signaling pathways have been implicated in CSC biology. FAK is a central signaling node in the development of CSCs and criticalfor the establishment of metastases. In 2012, research conducted in Dr. Weinberg's laboratory and published in Cancer Discovery elucidated the role ofFAK in breast cancer disease progression. This work found that increased FAK activity leads to increases in the metastatic capability of cancer cellsfollowing the process of epithelial to mesenchymal transition, an underlying mechanism in CSC development. Similarly, the role of PI3K/mTORsignaling has also been linked to disease progression and the survival of CSCs in multiple types of solid tumors and leukemia. An increase in the proportion of CSCs in response to chemotherapy has been observed in clinical studies. For example, at the Baylor College ofMedicine, breast cancer biopsies were taken from patients at the time of initial diagnosis and again following 12 weeks of treatment with docetaxel, astandard cancer chemotherapy widely used to treat breast cancer. The biopsies taken after 12 weeks of treatment showed increased expression ofbiomarkers for CSCs and an increased number of chemoresistant cells as compared to biopsies taken at the time of initial diagnosis. This result indicatesthat the CSC component of the tumor was relatively resistant to the chemotherapy. Moreover, it supports our belief that either a combination oftreatments or a single therapy that can effectively target both CSCs and other types of cancer cells is critical to create a durable clinical response.8Table of ContentsOUR SOLUTION Our solution is to discover and develop a next generation of oncology therapeutics targeting CSCs along with companion diagnostics. We believethat by developing therapeutics that target CSCs we can address the problem of cancer recurrence and metastasis. To achieve a durable clinical response,we believe that it may be necessary to kill both CSCs and other types of cancer cells in a tumor, as illustrated in the figure below, either with acombination of current cancer treatments and CSC-targeted drugs or a single therapeutic found to target both cancer cell populations.Our proprietary technology A persistent problem in the discovery of drugs targeting CSCs is the difficulty of isolating large numbers of CSCs. Without such large numbers,the discovery of drugs targeting CSCs using high-throughput screening is extremely difficult. Moreover, when CSCs are isolated, they typically do notremain stable in culture. Instead, over a short period of time, CSCs convert into other types of cancer cells. To address this problem, our scientific co-founders developed proprietary technology to create a stable population of CSCs that are suitable for use in high-throughput screening of smallmolecule compounds. These stable CSCs are similar to natural CSCs in that they are drug resistant and capable of initiating new tumors. We andscientists at the Whitehead Institute and the Broad Institute have used our technology and high-throughput screening methods to evaluate the ability ofover 300,000 compounds to kill CSCs.Biomarkers and diagnostics Because of the high level of toxicity of traditional chemotherapies and the variability in response of tumors to these treatments, it is criticallyimportant to get the right cancer drug to the right patient. As a result, the oncology field has been at the forefront of developing diagnostics to selectpatients who may benefit from specific therapies, which is sometimes referred to as personalized medicine. We are developing diagnostics designed toenhance our ability to deliver the right drug to the right patient. We believe that our diagnostics will enable us to identify patients that are the most likely to benefit from our drug candidates. By screening toidentify these patients, we expect to be able to select appropriate patients for enrollment in our clinical trials and ultimately, if we obtain marketingapproval, patients who are likely to respond to our therapies. We also plan to use these diagnostics to measure the selective killing of CSCs by our drugcandidates as one of the ways of determining their efficacy. We expect that our use of proprietary diagnostics may accelerate the clinical development process. We believe that use of these diagnostics mayprovide early, objective signals of drug activity to guide us to optimal dosing and the sequencing of agents more quickly. We also believe that thisapproach may ultimately enable physicians to identify patients who are likely to benefit most from these therapies and make better clinical decisionsduring therapy. We are working on companion diagnostics for our therapeutic programs based on both in-licensed and internally developed technology andscience. We believe that augmenting our internal capabilities9Table of Contentswith external collaborations with experienced third parties can reduce development risk and accelerate our progress in this field.OUR STRATEGY We believe that a key reason for the failure of many current cancer treatments is that they fail to kill CSCs, which we believe are responsible for theinitiation, metastasis and recurrence of many cancers. Our goal is to build a leading biopharmaceutical company focused on the discovery, developmentand, ultimately, commercialization of novel drugs and companion diagnostics targeting CSCs. Key elements of our strategy to achieve this goal are:•Execute on the potentially pivotal trial of VS-6063 in mesothelioma. We have met with the regulatory agencies in the United States andthe United Kingdom and, based on these discussions, we believe that positive results from this trial will enable us to seek regulatoryapproval for VS-6063 in mesothelioma. •Rapidly advance our product candidates through clinical development. We have initiated a clinical trial combining VS-6063 with thestandard chemotherapy paclitaxel in patients with ovarian cancer. We are planning additional clinical trials with VS-6063, VS-4718 andVS-5584 in 2013 and we expect to initiate further clinical trials over the next several years. •Expand the indications in which our product candidates may be used. In parallel to the mesothelioma and ovarian trials, we plan topursue additional disease indications as we believe CSCs are implicated in many types of tumors, including ovarian, breast, pancreatic,colon, brain, lung and leukemia. •Develop diagnostics for therapeutic products targeting CSCs. We plan to develop companion diagnostic products to support ourtherapeutic product candidates. We believe that use of these diagnostics may aid in the selection of patients for enrollment in our clinicaltrials and, if we obtain marketing approval, patients who are most likely to benefit from therapy with our drugs. We also believe thatthese diagnostics may be used to monitor patients' progress on therapy and aid physicians' ongoing treatment decisions. •Collaborate selectively to augment and accelerate translational research, development and commercialization. We may seek third-partycollaborators for the development and eventual commercialization of our product candidates. In particular, we may enter into third-partyarrangements for target oncology indications in which our potential collaborator has particular expertise or for which we need access toadditional research, development or commercialization resources. •Consider in-licensing rights to additional compounds. We may pursue the acquisition or in-license from third parties of rights toadditional compounds that target CSCs. We believe that our approach of identifying CSC targeting drug candidates from externalsources at various stages of development to supplement our internal programs may allow us to initiate clinical development of a diversepipeline of compounds more quickly than if we were to focus solely on internally developed candidates. •Maintain scientific leadership in the CSC field. We plan to continue to conduct research in the CSC field to further our understanding ofthe underlying biology of cancer progression and metastasis. We also plan to continue fostering relationships with top scientificadvisors, researchers and physicians. We believe that investing in the recruitment of exceptional advisors, employees and management iscritical to leadership in the CSC field.10Table of ContentsOUR PRODUCT CANDIDATESOverview Using our proprietary technology and high-throughput screening methods, we are evaluating compounds for their activity against CSCs in a waythat we believe has not been previously possible. We are focused on the discovery and development of small molecules to allow flexibility in the designof molecules for optimized efficacy and safety primarily as orally available drug candidates. We intend to incorporate patient selection markers and CSC-specific biomarkers into companion diagnostics for our product candidates for use inidentifying patients who are likely to benefit from treatment. We may use this information to aid in the selection of patients for late stage clinical trials.For example, we may use a clinical test for the expression status of the protein merlin in our potentially pivotal mesothelioma trial. We also plan toutilize these diagnostics to measure the effect that our product candidates have on CSCs in a tumor. Conventional chemotherapy works by stopping the function of cancer cells through a variety of mechanisms. Chemotherapies are usually nottargeted at any specific differences between cancer cells and normal cells. Rather, they kill cancer cells because cancer cells generally grow more rapidlythan normal cells and, as a result, are relatively more affected by the chemotherapy than normal cells. Because CSCs exhibit mechanisms of resistance,including a slower rate of growth than other cancer cells, they are often not susceptible to conventional chemotherapy. As a result, the treatments maysucceed at initially decreasing tumor burden but ultimately fail to kill the CSCs. To enhance therapeutic benefit, we may use our product candidates in combination with existing therapies in an effort to target both CSCs andother types of cancer cells. This approach is being utilized in our ongoing ovarian cancer trial of VS-6063 in combination with paclitaxel. A secondapproach to using CSC-targeting drugs in combination with chemotherapy is based upon the timing (or sequencing) of drug treatment. We believe thatusing our CSC-targeting drugs immediately following chemotherapeutic treatments (known as maintenance therapy) may complement the overall effectof treatment by eliminating the residual CSCs following chemotherapeutic treatment. We intend to use this approach in our planned potentially pivotalstudy of VS-6063 in mesothelioma. We are developing our product candidates for the treatment of multiple cancer types, initially mesothelioma, ovarian and breast cancer, and in thefuture, other cancers driven by CSCs. We believe that our product candidates target CSCs that have been implicated in aggressive cancers, metastasisand chemotherapeutic resistance.MESOTHELIOMAOverview Malignant mesothelioma is a malignant tumor of mesothelial cells which make up the pleura, or tissue lining, of many internal organs.Mesothelioma most commonly occurs in the pleura surrounding the lung, but occasionally involving the peritoneum surrounding internal organs of thedigestive tract, the lining of the heart or the lining of the testis. Asbestos fibers are the cause of most cases of mesothelioma. The proportion of men with mesothelioma directly attributable to occupationalasbestos exposure is approximately 85%. However, mesothelioma can also result from para-occupational exposures (for example, people who havelaundered contaminated clothing) and non-industrial environmental exposures. The latency period between first exposure to asbestos and death frommesothelioma is typically very long (20 to more than 40 years). Mesothelioma is a relatively rare disease; best estimates are that the prevalence within the United States is approximately 2,500-3,000 cases peryear and in the European Union it is approximately 3,500-4,000 cases per year.11Table of Contents A large majority of mesothelioma patients present with the pleural form around the lungs. Typically, symptoms are chest pain, shortness of breath,or both. The pain is usually dull, diffuse and characteristically worsens during the course of the illness. The pain may be described as heaviness oraching in the shoulder, arm, chest wall and upper abdomen. A 2011 study published in Oncogene reported that 90% of mesothelioma patient samples contained CSCs and implicated these cells in thedevelopment of drug resistance. In addition, the treatment of mesothelioma cells with Alimta led to an increase in the tumor-initiating capability of thedrug resistant cells, as compared to those treated with placebo control.Biomarkers Neurofibromatosis 2 (NF2) is a tumor suppressor gene that encodes the protein merlin. Inactivation of NF2 by mutation and/or deletion, leading toa reduction in the merlin protein, occurs in approximately 50% of malignant mesotheliomas. Merlin has been demonstrated to play roles in cell adhesion,invasion and cell motility in tumor cell lines partially through regulation of FAK. In turn, FAK mediates signal transduction by integrins and growthfactor receptors. Increased activation of FAK has been demonstrated in merlin-low mesothelioma cells, indicating that FAK may represent an importanttherapeutic target for malignant mesothelioma. We are developing a diagnostic for merlin to aid the use of VS-6063 in mesothelioma. We believe thepatients with tumors that are merlin-low may respond better to treatment with VS-6063.Current Treatment Malignant mesothelioma carries a poor prognosis with a median survival of approximately 12 months from diagnosis. Mesothelioma is currentlytreated with a combination of surgery, radiotherapy and chemotherapy. The only approved drug treatment regimen for mesothelioma is Alimta incombination with carboplatinum or cisplatinum, referred to here collectively as cisplatin. A study by Vogelzang in 2003 reported that the mediansurvival of patients treated with the combination of Alimta and cisplatin was 12.1 months as compared to the median survival of patients treated withcisplatin alone, which was 9.3 months. Following this first-line treatment, the duration of which is often limited by toxicity patients are monitored but donot receive further therapy until disease progression. As reported at ASCO 2011 by Baas et al., the median time to disease progression (progressionfree survival, or PFS) is approximately 4 months. Once progression occurs, there is no approved standard of care. As reported by Krug et al., in 2011in an evaluation of 332 patients, this second-line setting has a median PFS of 6 weeks.OVARIAN CANCEROverview Ovarian cancer forms in tissues of the ovary, one of a pair of female reproductive glands in which the ova, or eggs, are formed. Most ovariancancers are either ovarian epithelial carcinoma, cancer that begins in the cells on the surface of the ovary, or malignant germ cell tumors that begin in eggcells. According to the National Cancer Institute, epithelial carcinoma of the ovary is one of the most common gynecologic malignancies and the fifthmost frequent cause of cancer death in women, with 50% of all cases occurring in women older than 65 years.12Table of Contents The National Cancer Institute estimated that in January 2009 there were approximately 182,000 women in the United States with a history ofovarian cancer and in 2013 approximately 22,000 new cases of ovarian cancer will be diagnosed and approximately 14,000 women will die from thedisease.Prognosis For patients with ovarian cancer the most important prognostic factor is stage of the disease. Unfortunately, most patients with ovarian cancer havewidespread disease at diagnosis. This may be partly explained by relatively early spread to the rest of the abdominal cavity. General symptoms such asabdominal pain and swelling, gastrointestinal symptoms, and pelvic pain often go unrecognized, leading to delays in diagnosis. This is illustrated by theinformation in the following table, which shows, according to the National Cancer Institute's SEER Cancer Statistics Review, 2002-2008, the reductionin five-year survival rate for ovarian cancer patients based on the stage of the disease at the time at which the disease is diagnosed. The percentage ofpatients diagnosed at each stage of disease, referred to as stage distribution, is included below for comparative purposes.Current Treatment Most patients are treated with a combination of surgery, chemotherapy and radiation therapy. Surgery is often comprehensive to remove as muchof the tumor as possible and may include removal of the ovaries or a total hysterectomy where the uterus is also removed. Unfortunately, chemotherapy is rarely curative in the treatment of ovarian cancer and many tumors become resistant to platinum-basedchemotherapy, which is the primary treatment regimen. Further therapy with conventional chemotherapy is generally palliative, not curative, as thetumor is able to metastasize and spread to other sites in the body. We believe it is the presence of CSCs that lead to this resistance and eventual diseaseprogression.BREAST CANCEROverview The National Cancer Institute estimated that in January 2008 there were approximately 2.6 million women in the United States with a history ofbreast cancer. Breast cancer is currently the second most frequently diagnosed and the second most deadly cancer among women in the United States.The American Cancer Society estimated that in the United States in 2011, approximately 230,500 new cases of invasive breast cancer would bediagnosed in women and approximately 39,500 women would die from the disease. Breast cancers can be segregated into subtypes based upon the positive presence of three protein receptors:•estrogen receptor, or ER; •progesterone receptor, or PR; and •human epidermal growth factor receptor 2, or HER2. Triple negative breast cancer, or TNBC, is a type of breast cancer that does not express any of these three receptors. According to results from apopulation-based study of the California Cancer Registry published by the American Cancer Society in 2007, approximately 15% of all breast cancerswere classified as TNBC. In comparison with other breast cancers, TNBC tends to grow faster and has13Stage at Diagnosis StageDistribution (%) 5-yearRelative Survival (%) Localized (confined to primary site) 15 91.5 Regional (spread to regional lymph nodes) 17 71.9 Distant (cancer has metastasized) 61 26.9 Unknown (unstaged) 7 22.0 Table of Contentsa higher rate of metastases. Furthermore, TNBC tends to recur more often than other subtypes of breast cancer. Patients with TNBC generally have apoorer prognosis and lower overall survival rate than patients with breast cancers that are positive for the hormone receptors ER and PR. We believe that the natural disease progression of TNBC exhibits the key hallmarks of CSCs. Specifically, we believe that:•TNBC is initially responsive to chemotherapy because chemotherapy kills the majority of cancer cells, but not the CSCs. •TNBC returns more often than other types of breast cancer in part because there are CSCs that are not killed by current cancertreatments. •The site of recurrence is often at another place in the body as compared to the original tumor because the CSCs which are not killed areable to metastasize. •The recurring tumor may be resistant to therapy because it contains a high percentage of CSCs.Current treatment of breast cancer Surgery, radiation therapy, targeted therapy, hormone therapy and combinations of conventional chemotherapy are often used to treat breast cancer.However, these therapies carry significant side effects and frequently do not result in a durable clinical response, especially for patients with TNBC. The choice of cancer drugs used to treat breast cancer is guided by clinical classification of the tumor as ER positive or negative, PR positive ornegative and HER2 positive or negative. The presence, absence or combination of these biomarkers in patient tumors informs the selection of prescribeddrugs, which include the anti-estrogen therapies Tamoxifen and aromatase inhibitors, as well as agents that directly target HER2, such as Herceptin,Tykerb and Kadcyla. These treatments may slow or stop cancer growth and are currently considered the most successful treatments for breast cancer.However, because TNBC patients are negative for ER, PR and HER2, the treatment options for these patients are limited. In particular, the targetedtherapies, including Herceptin, Tykerb and anti-estrogen treatments, are not effective for these patients. For example, in a study conducted at BaylorCollege of Medicine, in which biopsies were taken from breast cancer patients both before and after conventional chemotherapy treatment, thepercentage of CSCs increased over the 12-week treatment period, indicating the survival of these cells. If tumors recur, which happens more often in TNBC than other breast cancers, further therapy with conventional chemotherapy is generallypalliative, not curative, as the CSCs are able to metastasize and spread to other sites in the body.FAK Inhibition ProgramOverview FAK expression is greater in many tumor types compared to normal tissue, particularly in cancers that have a high invasive and metastaticcapability. The contact between cancer cells and connective tissue stimulates FAK signaling. However, CSCs acquire the ability to survive in theabsence of contact with connective tissue. We believe that FAK signaling in CSCs may be maintained through alternative mechanisms, thus providingCSCs the ability to survive in the absence of cell contact. Accordingly, we believe that FAK signaling may be a central component of CSC biology thatallows CSCs to survive after exiting from a tumor mass and enable metastatic growth at other sites in the body. In 2012, our scientific co-founder Robert Weinberg reported in Cancer Discovery that FAK is a critical regulator of CSCs and inhibition of thissignaling pathway prevented disease progression and initiation of new metastatic lesions. An additional study by Dr. Weinberg reported in PNAS in2009, demonstrated that in a mouse model of breast cancer FAK signaling was required to enable lung metastasis. Non-CSCs, which lack the ability toincrease their FAK signaling activity through alternative mechanisms, remained non-metastatic in this model and did not survive dissemination to thelungs.14Table of ContentsResearchers at McGill University reported in PNAS that in a genetically modified mouse model the specific deletion of FAK from the mammary cellsprevented primary tumor formation and metastasis. Similarly, researchers at the University of Michigan demonstrated that specific deletion of FAKfrom mammary tumors prevented tumor initiating capacity in recipient mice. Scientific research suggests that increased FAK expression and activity is associated with metastatic progression and poor prognosis in multiplecancer types. For example, a 2009 retrospective study published in the Journal of Clinical Investigation identified the amplification, or increase innumber, of the gene encoding FAK in breast cancers. This gene amplification, and resulting high FAK expression, significantly correlated with theprogression of early stage, primary breast cancer to advanced metastatic disease. In an analysis of 295 breast cancer patients that was part of this study,elevated FAK expression was a marker of poor survival. The correlation of elevated FAK expression with poor survival was more significant than, andindependent of, other commonly used clinical parameters such as hormone receptor status. A similar finding was described in the Journal of ClinicalInvestigation in 2010 where it was reported that in women with ovarian cancer elevated FAK expression is correlated with advanced disease, metastasesand poor prognosis. A comparison of FAK activity in biopsies from patients revealed that high FAK activity correlated with a decrease in overallsurvival, from 3.2 to 1.7 years.VS-6063Overview We are currently evaluating VS-6063 as a potential therapy for mesothelioma, ovarian cancer and other solid tumors driven by CSCs. We believeVS-6063 targets CSCs through inhibition of FAK signaling. We have initiated a Phase 1/1b clinical trial of VS-6063 in combination with paclitaxel forpatients with ovarian cancer and expect to initiate a potentially pivotal clinical trial of VS-6063 in mesothelioma midyear 2013. We have applied fororphan drug designation for VS-6063 in mesothelioma in both the United States and the European Union.Development status of VS-6063 Phase 1 clinical trial in advanced solid tumors. VS-6063 demonstrated a good safety profile and initial signs of clinical activity in a Phase 1 trialin 46 patients with advanced solid tumors. Patients were selected on the basis of a confirmed diagnosis of a non-hematologic malignancy that wasunresponsive to currently available therapies or for which no standard therapy existed. VS-6063 was administered on a twice daily (BID) schedule anddose cohorts initially included a minimum of 3 patients. Dosing was based on flat milligram increments without adjustment for body size, the startingdose being 12.5 mg BID in the initial cohort. Safety, activity and pharmacokinetics, the process by which a drug is adsorbed, distributed andmetabolized in the body, were measured. 16/37 (43%) subjects enrolled at doses 100 mg BID (predicted active dose) experienced stable disease as their best response to treatment. Therecommended Phase 2 dose based on safety, pharmacokinetics and activity was determined to be 400-425 mg/BID.15Table of ContentsVS-6063 development plan Potentially pivotal study in mesothelioma. We are planning a randomized, double-blind, multi-center, multi-national study of VS-6063 in patientswith controlled mesothelioma post first-line therapy. We have met with the regulatory agencies in the US and the UK and, based on these discussions,we believe that positive results from this trial will enable us to seek regulatory approval for VS-6063 in mesothelioma. Even when front line therapy of Alimta plus cisplatin produces an objective response or stable disease, patients are noted to have progression ofdisease within approximately four months of completing therapy. The ability to maintain the responses seen with first line therapy and delay furtherprogression is therefore a critical goal in this disease. We believe it is the presence of chemotherapy-resistant CSCs in the residual tumor that lead toprogression and it is our goal to extend the amount of disease control time for patients through treatment with VS-6063.16Table of Contents Researchers hypothesized in 2010 in the International Journal of Oncology that early relapse of mesothelioma and further progression followingAlimta plus cisplatin results from the presence of a relatively small number of CSCs which exhibit resistance to standard therapy. This hypothesis issupported by our experiments with human mesothelioma cell lines which show that chemotherapeutic agents such as Alimta and cisplatin enrich forCSCs. As shown below, in contrast to Alimta, inhibition of FAK by VS-6063 effectively reduces the proportion of CSCs, as determined by thebiomarker Aldefluor. This suggests that targeting FAK might be expected to reduce the CSC population and overcome the resistance that develops toAlimta and cisplatin in mesothelioma. In a report at the NCI-AACR-EORTC conference in 2012, in a Phase 1 study of the orally available FAK inhibitor GSK2256098 byGlaxoSmithKline (GSK), a median PFS of 17.7 weeks was observed in 29 patients with recurrent mesothelioma in comparison to the previouslyreported median PFS of just 6.1 weeks in 332 similar patients receiving placebo. In addition, GSK evaluated the response to treatment based upon thestatus of the biomarker merlin. Patients who were deemed to be merlin-low had a median PFS of 24.1 weeks compared with 11.4 weeks for thosepatients whose tumors were deemed to be merlin-high. These observations generally suggest that FAK inhibition in mesothelioma may be helpful toslow disease progression and indicate that use of a diagnostic to identify patients with low levels of the biomarker merlin may predict for those mostlikely to have the greatest response to treatment with a FAK inhibitor. Our potentially pivotal trial is designed to treat patients who have not progressed on at least 4 cycles of Alimta plus cisplatin as their most recenttherapy. Immediately following completion of the front-line chemotherapy, patients would begin to take VS-6063 or placebo by mouth, twice a day.This treatment strategy is known as a maintenance setting therapy and there is no current standard of care recommended for patients with mesotheliomain this setting. Within both the VS-6063 and placebo treatment groups, the patients will be stratified by their merlin expression, as described morebelow. The endpoints of the study are overall survival, PFS and quality of life. Based on discussions with the regulatory agencies in the United Statesand United Kingdom, we believe that if VS-6063 significantly increases PFS, it may lead to an accelerated regulatory approval. Mesothelioma is a rare disease making it important to derive as much information as possible, with as great a certainty as possible, from eachclinical trial. It is hypothesized that the treatment effect in the subjects with merlin low tumors is likely to be greater than that in the merlin high group.Therefore, our design incorporates a sample size reassessment at a pre-planned, interim analysis. The goals of the adaptive design approach are:•To identify if the overall population is benefitting or if the merlin low sub population is responding better to treatment. •To modify patient enrollment and only continue enrolling patients with merlin low tumors if those patients are responding better totreatment.17Table of Contents This study design enables an analysis that could support approval in either the full treatable mesothelioma population or the approximately half ofthe patients with merlin low tumors. We believe the use of a companion diagnostic test to select the merlin low patients who may respond better to FAKtreatment in mesothelioma may increase our ability to properly treat this patient population. We believe the sequential dosing of chemotherapy (eg. Alimta plus cisplatin) and a CSC-targeted agent (VS-6063) in the maintenance setting willallow us to treat both the non-CSCs and CSCs. Phase 1/1b combination study in ovarian cancer. Ovarian cancer rapidly develops resistance to chemotherapy. Following development ofresistance to front-line platinum therapy, there is not an approved standard of care although treatment with the chemotherapeutic paclitaxel is often used.We are currently conducting a clinical trial to evaluate the safety and efficacy of VS-6063 administered in combination with paclitaxel in patients withadvanced ovarian cancer. This clinical study is comprised of 2 parts. Phase 1 is a dose escalation of oral VS-6063 twice daily in addition to the standard dose of weeklypaclitaxel. The purpose of Phase 1 is to assess the safety, evaluate pharmacokinetic parameters and determine the recommended Phase 1b dose incombination with paclitaxel. Phase 1b will include patients who will be treated with the recommended Phase 1b dose of VS-6063 in combination withpaclitaxel. The purpose of Phase 1b is to evaluate the pharmacodynamic effect, the biochemical and physiological effect of a drug on the body, of VS-6063 through measurement of biomarkers from tumor biopsies pre- and post-treatment and assess the anti-cancer activity of VS-6063 whenadministered in combination with paclitaxel according to Response Evaluation criteria in Solid Tumors (RECIST) guidelines. We believe this approach will allow us to treat both the non-CSCs and CSCs simultaneously by the combination of chemotherapy (eg. paclitaxel)and a CSC-targeted agent (VS-6063) to hopefully enable a more durable clinical response.VS-4718Overview We identified the CSC-targeted activity and are currently evaluating VS-4718 as a potential therapy for cancers driven by CSCs. We believe VS-4718 targets CSCs through inhibition of FAK signaling similar to VS-6063. We expect to initiate a clinical trial with VS-4718 during the first half of2013.Preclinical development We are conducting a comprehensive program to study VS-4718 as a potential treatment for cancers associated with CSCs and increased FAKactivity. Key results to date from preclinical studies of VS-4718 are summarized below. Biochemical and cellular tests. In biochemical testing, VS-4718 inhibited purified FAK and demonstrated in vitro selectivity against a panel of107 different protein kinases. In addition, in various in vitro assessments of drug effects on CSCs, VS-4718 exhibited potent activity and a preferentialeffect, or selectivity, for CSCs as compared to other types of cancer cells. Pharmacokinetics, pharmacokinetics and tolerability in mice. VS-4718 was well tolerated in mice after both acute and chronic dosing. VS-4718also exhibited acceptable pharmacokinetics in mice. In mouse models assessing pharmacodynamics, a single dose of VS-4718 inhibited FAK activity intumors over a 12-hour period indicating that twice daily dosing may maintain constant FAK inhibition.18Table of Contents Effect of FAK inhibition in merlin low cell lines and mouse tumor models of mesothelioma. VS-4718 has exhibited in vitro cytotoxic effects onmesothelioma cell lines and tumor growth inhibition in mouse models of mesothelioma. Merlin low cells lines derived from mesothelioma tumors wereobserved to be particularly sensitive to FAK inhibition. VS-4718 was also tested in models in which merlin low mesothelioma cells were implanted intoa mouse and the tumor was allowed to develop. Upon tumor formation, the mice were treated with VS-4718 by oral administration at concentrations of25 or 50 mg/kg of body weight or a placebo control through the end of the experiment. As shown in the figure below, single agent VS-4718 treatmentcaused tumor regression in a dose-dependent fashion in contrast to placebo control. Mouse models of breast cancer. VS-4718 has exhibited tumor growth inhibition and reduction of metastatic burden in several mouse models ofbreast cancer. In one experiment, VS-4718 was tested in a model in which breast cancer cells were implanted into a mouse and the tumor was allowedto develop. Upon tumor formation, the mice were treated with VS-4718 in drinking water at a concentration of 0.5 mg/ml or a placebo control beginningat day 12 through the end of the experiment. As shown in the figure below, the tumor volume in the VS-4718 treatment group was significantly smallerthan in the placebo group from day 27 through the end of the experiment. In addition, at day 70 the weight of the primary tumor and the number of lungmetastases in the VS-4718 treatment group were both significantly less than in the placebo group. The vertical line on each data point in the tumor volume figure above represents the standard deviation from the mean. The box and vertical line foreach data point in the tumor weight and metastases figures above show the distribution of the data. The square data point inside the box19 Table of Contentsrepresents the mean. The bottom of the box represents the 25th percentile, the middle line in the box represents the median and the top of the boxrepresents the 75th percentile. The vertical lines projecting from the bottom and top of the box represent the 5th and 95th percentiles.VS-4718 development plan We expect to file the Investigational New Drug (IND) submission, that includes preclinical efficacy and toxicology studies, and to initiate aPhase 1 clinical trial with VS-4718 during the first half of 2013. In the Phase 1 clinical trial, we plan to enroll patients with advanced solid tumorswhere CSCs are implicated in disease progression. The dose escalation portion of the Phase 1 clinical trial would be designed to determine thebiologically active dose and maximum tolerated dose. Additional patients will be enrolled to assess safety, tolerability and to evaluate initial signs ofactivity.PI3K/mTOR Inhibition ProgramOverview The PI3 kinase/mTOR pathway plays a central role in cancer cell proliferation and survival. Depending on the mode of pathway activation,different PI3K isoforms and mTOR complexes have been shown to play essential roles in oncogenesis and survival of CSCs. There are four Class 1PI3K enzymes, known as alpha, beta, gamma and delta, and two mTOR complexes known as mTORC1 and mTORC2. Studies published in Nature in 2006 reported that genetic activation of the PI3K/mTOR pathway in adult blood cells led to generation of leukemiaCSCs. In addition, multiple studies have shown that PI3K pathway activity contributes to the maintenance of CSCs in breast, lung, and prostate cancers.VS-5584Overview VS-5584 is an orally available small molecule that potently and selectively inhibits PI3K/mTOR signaling. VS-5584 is currently in IND-enablingtoxicology studies and is expected to enter Phase 1 clinical trials in patients with advanced cancers in the second half of 2013.Preclinical development We are conducting a comprehensive preclinical program to study VS-5584 as a potential treatment for cancer. Key results of this program to dateare summarized below. Biochemical testing. In biochemical testing, VS-5584 was equipotent against all four human Class 1 PI3K isoforms and mTOR kinase, theenzymatic component of both mTORC1 and mTORC2 (IC50 values displayed below in nM). In general, the more potent a drug is, the lower the doserequired for a therapeutic effect. An IC50 value measures the dose at which the activity of the enzyme is reduced by 50%, a commonly used measure ofpotency. VS-5584 has demonstrated a selective effect for these kinases versus a panel of over 400 kinases.20Table of Contents In vitro killing of CSCs. In an in vitro test, SUM159 triple negative breast cancer cells were treated with VS-5584 or paclitaxel for 4 days, andthe percentage of Aldefluor-positive CSCs was assessed. VS-5584 dose-dependently decreased the percentage of CSCs, while paclitaxel increased thepercentage of CSCs.VS-5584 clinical development plan Assuming successful completion of preclinical studies, we expect to initiate a Phase 1 clinical trial with VS-5584 during the second half of 2013.We anticipate enrolling patients with advanced cancer. The Phase 1 clinical trial will be designed to determine the safety profile of VS-5584 and initialsigns of clinical activity.LICENSESWhitehead Institute for Biomedical ResearchDrug discovery platform license agreement In October 2010, we entered into an exclusive license agreement with the Whitehead Institute, or the drug discovery platform license agreement,which we amended and restated in January 2012, both on its own behalf and as sole and exclusive agent of Harvard and MIT. Under the drugdiscovery platform license agreement, we acquired an exclusive, royalty-bearing, worldwide license under patent rights owned by the WhiteheadInstitute, Harvard and MIT to develop, make, use and sell products covered by the licensed patent rights for use in treating cancer, and to develop andperform licensed processes, in each case, for all human therapeutic, prognostic and diagnostic uses. We are required to use commercially reasonable efforts to develop and commercialize licensed products under the agreement. In particular, we arerequired to fulfill specific development and regulatory milestones by particular dates and, during each calendar year, either spend a specified amount forresearch and development, actively conduct one or more clinical trials for a licensed product or a product identified using a licensed process that doesnot constitute a licensed product, which we refer to as an identified product, prepare, file or pursue a filed application for regulatory approval of alicensed product or an identified product, or launch or sell a licensed product or identified product. Under the agreement, we paid the Whitehead Institute an upfront license fee and reimbursed patent related fees and costs incurred by the WhiteheadInstitute, Harvard and MIT totaling $104,000 in the aggregate and issued 166,664 shares of our common stock to the Whitehead Institute and entitiesand individuals affiliated with the Whitehead Institute. We also agreed to pay the Whitehead Institute annual license maintenance fees, milestone payments, royalties as a percentage of net sales and apercentage of sublicense income that we receive.21Table of ContentsAnnual license maintenance fees are creditable against royalties, which are described below, earned during the same calendar year. Milestone paymentsare triggered upon the achievement of specified development, regulatory and commercialization milestones and are not creditable against the royaltiesdescribed below. For each licensed product, we agreed to make milestone payments of up to an aggregate of $1,560,000 plus an additional amount foreach subsequent approval of additional indications for a maximum number of licensed products. For each identified product that is not a licensedproduct, we agreed to make milestone payments of up to an aggregate of $815,000 plus an additional amount for each subsequent approval of additionalindications for a maximum number of identified products. Each type of specified milestone payment is payable only for each of the maximum number oflicensed products and the maximum number of identified products, as the case may be, to achieve the applicable milestone. In addition, a separatemilestone payment is due upon the first commercial sale of each licensed product or identified product that is a diagnostic or prognostic test. A singleadditional milestone payment is due for the first issuance of licensed patent rights in the United States, the United Kingdom, France, Germany, Spain orItaly. The royalty rate is in the low single digits as a percentage of net sales for licensed products that are therapeutics, the mid single digits for licensedproducts that are diagnostics or prognostics and less than one percent for identified products. The Whitehead Institute, Harvard and MIT retain the right to, and may grant licenses to other academic and non-profit institutions for the right to,practice the licensed patent rights for research, teaching and educational purposes. The Whitehead Institute, Harvard, MIT or any such other institutioncould seek to license to third parties any intellectual property rights that it discovers using the licensed patent rights while pursuing these purposes.Under the agreement, we have a right, subject to the Whitehead Institute's obligations under third party research funding agreements, to negotiate alicense for any compounds identified prior to a specified date in the Whitehead Institute's laboratory run by Dr. Weinberg that selectively target CSCsgenerated by induction through the EMT process. After a specified period of time, if a third party requests to sublicense the patent rights for a product or process that is not directly competitive withour products or processes, we must enter into good-faith negotiations to grant a sublicense for such proposed product or process. If we do not grant asublicense within a specified period of time after receiving a written request, the Whitehead Institute may grant a license to the third party and our rightsin the field of use of such sublicense will terminate. Additionally, after a specified period of time, if we are not actively conducting high-throughputscreening using the licensed patent rights to identify product candidates, then, except for any rights directed to uses that we are actively developing, theWhitehead Institute may convert our license to the licensed patent rights from exclusive to non-exclusive. We have the right to terminate the agreement for any reason upon at least 90 days' prior written notice. The Whitehead Institute has the right toterminate the agreement if we and all of our sublicensees cease to carry on business related to the agreement for a specified period of time, we fail to payany amounts due and payable under the agreement to the Whitehead Institute, subject to a grace period, we materially breach the agreement and fail tocure such breach within a specified grace period or we or a sublicensee challenge the licensed patent rights in a legal or administrative proceeding. Theagreement otherwise terminates upon the expiration or abandonment of all licensed patents and patent applications.Cancer diagnostic license agreement In October 2010, we entered into a separate license agreement with the Whitehead Institute, or the cancer diagnostic license agreement, underwhich we acquired a non-exclusive, worldwide license to patent rights owned by the Whitehead Institute for research purposes. In December 2011, weamended and restated this agreement with the Whitehead Institute. Under the amended and restated cancer diagnostic license agreement, we acquired anexclusive, royalty-bearing, worldwide license under these patent rights to develop, make, use and sell products covered by the licensed patent rights andto22Table of Contentsdevelop and perform services using a licensed product or the practice of the licensed patent rights for or on behalf of a third party, in each case, forcancer diagnostics and companion clinical uses. Under the agreement, we paid the Whitehead Institute upfront license fees and reimbursed patent related fees and costs incurred by the WhiteheadInstitute totaling $70,000 in the aggregate. We also agreed to pay the Whitehead Institute annual license maintenance fees, milestone payments, royaltiesas a percentage of net sales and a percentage of sublicense income that we receive. Annual license maintenance fees are creditable against royalties,which are described below, earned during the same calendar year. Milestone payments of up to an aggregate of $825,000 are triggered upon theachievement of specified regulatory and commercialization milestones and are not creditable against the royalties described below. The royalty rate is inthe mid single digits as a percentage of net sales. If we are required to pay royalties to a third party in consideration of a license or similar right in order to make, use or sell a licensed product orlicensed service, then we may deduct up to 50% of the amounts paid to such third party, subject to specified limitations, from the payments that we oweto the Whitehead Institute for such licensed product or licensed service. We are required to use commercially reasonable efforts to develop and commercialize licensed products or licensed services under the agreement.In particular, we are required to fulfill specific development, regulatory and commercialization milestones by particular dates and to commit a specifiednumber of full time staff equivalents toward the development of a licensed product or licensed service until the first commercial sale of a licensedproduct or performance of a licensed service. The Whitehead Institute retains the right to, and may grant licenses to other academic and non-profit institutions for the right to, practice thelicensed patent rights for research, teaching and educational purposes. The Whitehead Institute or any such other institution could seek to license to thirdparties any intellectual property rights that it discovers using the licensed patent rights while pursuing these purposes. After a specified period of time, if a third party requests to sublicense the patent rights for a product or service that is not directly competitive withour products or services, we must enter into good-faith negotiations to grant a sublicense for such proposed product or service. If we do not grant sucha sublicense within a specified period of time after receiving a written request, the Whitehead Institute may grant a license to the third party and ourrights in the field of use of such sublicense will terminate. Additionally, after a specified period of time, if the market is not being reasonably served byus, as determined by the Whitehead Institute, and a third party requests to sublicense the patent rights for a product or service that is directly competitivewith our products or services, we must enter into good-faith negotiations to grant a sublicense for such proposed product or service. If we do not grantsuch a sublicense within a specified period of time after receiving a written request, we and the Whitehead Institute have agreed to mutually select aqualified independent third party to set commercially reasonable terms and conditions consistent with similar technology in the industry under which wewould sublicense our rights for such proposed product or service to the third party. Additionally, after a specified period of time, if we are not activelyconducting efforts to validate, use or commercialize a license product or licensed service, then the Whitehead Institute may convert our license to thelicensed patent rights from exclusive to nonexclusive. We have the right to terminate the agreement for any reason upon at least 90 days' prior written notice. The Whitehead Institute has the right toterminate the agreement if we and all of our sublicensees cease to carry on business related to the agreement for a specified period of time, we fail to payany amounts due and payable under the agreement to the Whitehead Institute, subject to a grace period, we materially breach the agreement and fail tocure such breach within a specified grace period or we or a sublicensee challenge the licensed patent rights in a legal or administrative23Table of Contentsproceeding. The agreement otherwise terminates upon the expiration or abandonment of all licensed patents and patent applications.Poniard Pharmaceuticals, Inc. In November 2011, we entered into a license agreement with Poniard under which we acquired an exclusive, worldwide license under patent rightsand know-how owned or controlled by Poniard to develop, make, use and sell compounds and products covered by the licensed patent rights for thediagnosis, treatment, prevention or control of all human diseases and conditions. The licensed compounds include VS-4718 and any other compoundscovered by a licensed patent right under the agreement that have the inhibition of FAK as a primary mode of action. These licensed patent rights includepatent rights owned by Scripps and licensed to Poniard. In accordance with the agreement between Poniard and Scripps, Scripps retains the right togrant non-exclusive licenses, without the right to sublicense, to nonprofit or academic institutions to use for any noncommercial research or educationpurposes any licensed patent rights owned by Scripps and licensed to Poniard. Under the agreement, we paid Poniard an upfront license fee and agreed to pay Poniard milestone payments of up to an aggregate of $13,250,000upon the achievement of specified development and regulatory milestones. We also agreed to issue to Poniard a warrant to purchase 142,857 shares ofour common stock upon the first dosing of the first patient in our first Phase 1 clinical trial of a licensed product. The exercise price of such warrantwould be equal to the average closing price of our common stock during the five trading days preceding such issue date. In addition, we agreed to paylow to mid single digit royalties to Poniard as a percentage of net sales of licensed products. Our obligation to pay royalties continues on a country bycountry basis until the expiration of all licensed patent rights covering licensed products in such country. If the royalty term under our agreement withPoniard expires with respect to a licensed product in a country and Poniard continues to have royalty payment obligations under its agreement withScripps with respect to our net sales of licensed products in such country, we agreed to pay Poniard the royalty amount due to Scripps with respect tonet sales of such licensed product in such country. Poniard is responsible for all amounts payable to any third party under any agreement to which Poniard was a party as of the date of our agreementthat are applicable to rights licensed to us, including amounts payable to Scripps with respect to the patent rights owned by Scripps and licensed toPoniard. If we license or acquire technology from a third party in order to develop or commercialize a licensed product and are required to pay suchthird party license fees, milestone payments, royalties or other amounts, then we may deduct up to 50% of the amount paid to such third party from thepayments that we owe to Poniard for such licensed product. This deduction is subject to specified limitations, including that in no event will any suchdeduction reduce a payment that we owe to Poniard to less than 50% of the otherwise applicable amount. We are required to use commercially reasonable efforts to develop and, subject to regulatory approval, commercialize licensed products in theUnited States, the United Kingdom, France, Germany and Japan. We have the right to terminate the agreement or any portion of our licensed rights under the agreement upon at least 90 days' prior written notice.We and Poniard each have the right to terminate the agreement if the other party materially breaches the agreement and fails to cure such breach within aspecified grace period, subject to the right of either party to submit a dispute to arbitration. The agreement otherwise terminates upon the last to expirelicensed patent right covering a licensed product.24Table of ContentsPfizer Inc. On July 11, 2012, we entered into a license agreement with Pfizer Inc., or Pfizer, under which Pfizer granted us worldwide, exclusive rights toresearch, develop, manufacture and commercialize products containing certain of Pfizer's inhibitors of focal adhesion kinase for all therapeutic,diagnostic and prophylactic uses in humans. We have the right to grant sublicenses under the foregoing licensed rights, subject to certain restrictions.We are solely responsible, at our own expense, for the clinical development of these products, which is to be conducted in accordance with an agreed-upon development plan. We are also responsible for all manufacturing and commercialization activities at our own expense. Pfizer is required to provideus with an initial quantity of clinical supply of one of the products for an agreed upon price. Upon entering into the license agreement, we made a one-time cash payment to Pfizer in the amount of $1.5 million and issued to Pfizer 192,012shares of our common stock. Pfizer is also eligible to receive up to $2 million in developmental milestones and up to an additional $125 million basedon the successful attainment of regulatory and commercial sales milestones. Pfizer is also eligible to receive high single to mid double digit royalties onfuture net sales of the products. Our royalty obligations with respect to each product in each country begin on the date of first commercial sale of theproduct in that country, and end on the later of 10 years after the date of first commercial sale of the product in that country or the date of expiration orabandonment of the last claim contained in any issued patent or patent application licensed by Pfizer to us that covers the product in that country. The license agreement will remain in effect until the expiration of all of our royalty obligations to Pfizer, determined on a product-by-product andcountry-by-country basis. So long as we are not in breach of the license agreement, we have the right to terminate the license agreement at will on aproduct-by-product and country-by-country basis, or in its entirety, upon 90 days written notice to Pfizer. Either party has the right to terminate thelicense agreement in connection with an insolvency event involving the other party or a material breach of the license agreement by the other party thatremains uncured for a specified period of time. If the license agreement is terminated by either party for any reason, worldwide rights to the research,development, manufacture and commercialization of the products revert back to Pfizer.COMPETITION The biotechnology and pharmaceutical industries are characterized by rapidly advancing technologies, intense competition and a strong emphasison proprietary products. While we believe that our technology, development experience and scientific knowledge provide us with competitiveadvantages, we face potential competition from many different sources, including major pharmaceutical, specialty pharmaceutical and biotechnologycompanies, academic institutions and governmental agencies and public and private research institutions. Any product candidates that we successfullydevelop and commercialize will compete with existing therapies and new therapies that may become available in the future. There are other companies working to develop therapies that target CSCs. These companies include divisions of large pharmaceutical companiesincluding Astellas Pharma Inc., Sanofi-Aventis U.S. LLC, GlaxoSmithKline plc, Boehringer Ingelheim GmbH, Pfizer Inc. and others. There are alsobiotechnology companies of various sizes that are developing therapies against CSCs, including OncoMed Pharmaceuticals, Inc., BostonBiomedical Inc. and Stemline Therapeutics, Inc. Many of our competitors may have significantly greater financial resources and expertise in research and development, manufacturing, preclinicaltesting, conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do. Mergers and acquisitions in thepharmaceutical, biotechnology and diagnostic industries may result in even more resources being concentrated among a smaller number of ourcompetitors. These competitors also compete with us in25Table of Contentsrecruiting and retaining qualified scientific and management personnel and establishing clinical trial sites and patient registration for clinical trials, as wellas in acquiring technologies complementary to, or necessary for, our programs. Smaller or early stage companies may also prove to be significantcompetitors, particularly through collaborative arrangements with large and established companies. The key competitive factors affecting the success of all of our product candidates, if approved, are likely to be their efficacy, safety, convenience,price, the effectiveness of companion diagnostics in guiding the use of related therapeutics, the level of generic competition and the availability ofreimbursement from government and other third-party payors. Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective,have fewer or less severe side effects, are more convenient or are less expensive than any products that we may develop. Our competitors also mayobtain FDA or other regulatory approval for their products more rapidly than we may obtain approval for ours, which could result in our competitorsestablishing a strong market position before we are able to enter the market. In addition, our ability to compete may be affected in many cases byinsurers or other third-party payors seeking to encourage the use of generic products. There are many generic products currently on the market for theindications that we are pursuing, and additional products are expected to become available on a generic basis over the coming years. If our therapeuticproduct candidates are approved, we expect that they will be priced at a significant premium over competitive generic products. The most common methods of treating patients with cancer are surgery, radiation and drug therapy, including chemotherapy, hormone therapy andtargeted drug therapy. There are a variety of available drug therapies marketed for cancer. In many cases, these drugs are administered in combination toenhance efficacy. While our product candidates may compete with many existing drug and other therapies, to the extent they are ultimately used incombination with or as an adjunct to these therapies, our product candidates will not be competitive with them. Some of the currently approved drugtherapies are branded and subject to patent protection, and others are available on a generic basis. Many of these approved drugs are well establishedtherapies and are widely accepted by physicians, patients and third-party payors. In general, although there has been considerable progress over the pastfew decades in the treatment of cancer and the currently marketed therapies provide benefits to many patients, these therapies all are limited to someextent in their efficacy and frequency of adverse events, and none of them are successful in treating all patients. As a result, the level of morbidity andmortality from cancer remains high. In addition to currently marketed therapies, there are also a number of products in late stage clinical development to treat cancer. These products indevelopment may provide efficacy, safety, convenience and other benefits that are not provided by currently marketed therapies. As a result, they mayprovide significant competition for any of our product candidates for which we obtain market approval.MANUFACTURING We do not own or operate, and currently have no plans to establish, any manufacturing facilities. We currently rely, and expect to continue to rely,on third parties for the manufacture of our product candidates and any products that we may develop, other than small amounts of compounds that wemay synthesize ourselves for preclinical testing. To date, we have obtained starting materials for our supply of the bulk drug substance for our productcandidates from one third-party manufacturer. We obtain our supplies from this manufacturer on a purchase order basis and do not have a long-termsupply arrangement in place. We do not currently have arrangements in place for redundant supply or a second source for bulk drug substance. If ourcurrent third-party manufacturer should become unavailable to us for any reason, we believe that there are several potential replacements, although wemight incur some delay in identifying and qualifying such replacements.26Table of Contents All of our drug candidates are organic compounds of low molecular weight, generally called small molecules. We select compounds not only onthe basis of their potential efficacy and safety, but also for their ease of synthesis and reasonable cost of their starting materials. We expect to continue todevelop drug candidates that can be produced cost-effectively at third-party manufacturing facilities.GOVERNMENT REGULATION Government authorities in the United States, at the federal, state and local level, and in other countries extensively regulate, among other things, theresearch, development, testing, manufacture, including any manufacturing changes, packaging, storage, recordkeeping, labeling, advertising, promotion,distribution, marketing, post-approval monitoring and reporting, import and export of pharmaceutical products, such as those we are developing.United States drug approval process In the United States, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act, or FDCA, the Public Health Service Act andimplementing regulations. The process of obtaining regulatory approvals and the subsequent compliance with appropriate federal, state, local andforeign statutes and regulations requires the expenditure of substantial time and financial resources. Failure to comply with the applicable United Statesrequirements at any time during the product development process, approval process or after approval, may subject an applicant to a variety ofadministrative or judicial sanctions, such as the FDA's refusal to approve pending applications, withdrawal of an approval, imposition of a clinical hold,issuance of warning letters, product recalls, product seizures, total or partial suspension of production or distribution injunctions, fines, refusals ofgovernment contracts, restitution, disgorgement of profits or civil or criminal penalties. The process required by the FDA before a drug may be marketed in the United States generally involves the following:•completion of preclinical laboratory tests, animal studies and formulation studies in compliance with the FDA's good laboratory practice,or GLP, regulations; •submission to the FDA of an IND, which must become effective before human clinical trials may begin; •approval by an independent institutional review board, or IRB, at each clinical site before each trial may be initiated; •performance of adequate and well-controlled human clinical trials in accordance with good clinical practices, or GCP, to establish thesafety and efficacy of the proposed drug for each indication; •submission to the FDA of a new drug application, or NDA; •satisfactory completion of an FDA advisory committee review, if applicable; •satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the product is produced to assesscompliance with current good manufacturing practices, or cGMP, requirements and to assure that the facilities, methods and controls areadequate to preserve the drug's identity, strength, quality and purity; and •FDA review and approval of the NDA.Preclinical studies Preclinical studies include laboratory evaluation of product chemistry and formulation, as well as in vitro and animal studies to assess the potentialfor adverse events and in some cases to establish a27Table of Contentsrationale for therapeutic use. The conduct of preclinical studies is subject to federal regulations and requirements, including GLP regulations forsafety/toxicology studies. An IND sponsor must submit the results of the preclinical tests, together with manufacturing information, analytical data, anyavailable clinical data or literature and plans for clinical studies, among other things, to the FDA as part of an IND. Some long-term preclinical testing,such as animal tests of reproductive adverse events and carcinogenicity, may continue after the IND is submitted. An IND automatically becomeseffective 30 days after receipt by the FDA, unless before that time the FDA raises concerns or questions related to one or more proposed clinical trialsand places the trial on clinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial canbegin. As a result, submission of an IND may not result in the FDA allowing clinical trials to commence.Clinical trials Clinical trials involve the administration of the investigational new drug to human subjects under the supervision of qualified investigators inaccordance with GCP requirements, which include, among other things, the requirement that all research subjects provide their informed consent inwriting before their participation in any clinical trial. Clinical trials are conducted under written study protocols detailing, among other things, theobjectives of the study, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated. A protocol for each clinical trial andany subsequent protocol amendments must be submitted to the FDA as part of the IND. In addition, an IRB at each institution participating in theclinical trial must review and approve the plan for any clinical trial before it commences at that institution, and the IRB must conduct continuing review.The IRB must review and approve, among other things, the study protocol and informed consent information to be provided to study subjects. An IRBmust operate in compliance with FDA regulations. Information about certain clinical trials must be submitted within specific timeframes to the NationalInstitutes of Health for public dissemination on their ClinicalTrials.gov website. Human clinical trials are typically conducted in three sequential phases, which may overlap or be combined:•Phase 1: The drug is initially introduced into healthy human subjects or patients with the target disease or condition and tested forsafety, dosage tolerance, absorption, metabolism, distribution, excretion and, if possible, to gain an early indication of its effectiveness. •Phase 2: The drug is administered to a limited patient population to identify possible adverse effects and safety risks, to preliminarilyevaluate the efficacy of the product for specific targeted diseases and to determine dosage tolerance and optimal dosage. •Phase 3: The drug is administered to an expanded patient population in adequate and well-controlled clinical trials to generate sufficientdata to statistically confirm the efficacy and safety of the product for approval, to establish the overall risk-benefit profile of the productand to provide adequate information for the labeling of the product. Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA and more frequently if serious adverseevents occur. Phase 1, Phase 2 and Phase 3 clinical trials may not be completed successfully within any specified period, or at all. Furthermore, theFDA or the sponsor may suspend or terminate a clinical trial at any time on various grounds, including a finding that the research subjects are beingexposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if the clinical trial is notbeing conducted in accordance with the IRB's requirements or if the drug has been associated with unexpected serious harm to patients.28Table of ContentsMarketing approval Assuming successful completion of the required clinical testing, the results of the preclinical and clinical studies, together with detailed informationrelating to the product's chemistry, manufacture, controls and proposed labeling, among other things, are submitted to the FDA as part of an NDArequesting approval to market the product for one or more indications. Under federal law, the submission of most NDAs is additionally subject to asubstantial application user fee, currently exceeding $1.8 million, and the sponsor of an approved NDA is also subject to annual product andestablishment user fees, currently exceeding $98,000 per product and $520,000 per establishment. These fees are typically increased annually. The FDA conducts a preliminary review of all NDAs within the first 60 days after submission before accepting them for filing to determinewhether they are sufficiently complete to permit substantive review. The FDA may request additional information rather than accept an NDA for filing.In this event, the application must be resubmitted with the additional information. The resubmitted application is also subject to review before the FDAaccepts it for filing. Once the submission is accepted for filing, the FDA begins an in-depth substantive review. The FDA has agreed to specifiedperformance goals in the review of NDAs. Under these goals, the FDA has committed to review most such applications for non-priority productswithin 10 months, and most applications for priority review products, that is, drugs that the FDA determines represent a significant improvement overexisting therapy, within six months. These performance goals likely will be extended by several months when the Prescription Drug User Fee Act isreauthorized in 2012. The review process may be extended by the FDA for three additional months to consider certain information or clarificationregarding information already provided in the submission. The FDA may also refer applications for novel drugs or products that present difficultquestions of safety or efficacy to an advisory committee, typically a panel that includes clinicians and other experts, for review, evaluation and arecommendation as to whether the application should be approved. The FDA is not bound by the recommendations of an advisory committee, but itconsiders such recommendations carefully when making decisions. Before approving an NDA, the FDA typically will inspect the facility or facilities where the product is manufactured. The FDA will not approvean application unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assureconsistent production of the product within required specifications. In addition, before approving an NDA, the FDA will typically inspect one or moreclinical sites to assure compliance with GCP and integrity of the clinical data submitted. The testing and approval process requires substantial time, effort and financial resources, and each may take many years to complete. Data obtainedfrom clinical activities are not always conclusive and may be susceptible to varying interpretations, which could delay, limit or prevent regulatoryapproval. The FDA may not grant approval on a timely basis, or at all. We may encounter difficulties or unanticipated costs in our efforts to develop ourproduct candidates and secure necessary governmental approvals, which could delay or preclude us from marketing our products. After the FDA's evaluation of the NDA and inspection of the manufacturing facilities, the FDA may issue an approval letter or a completeresponse letter. An approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications. Acomplete response letter generally outlines the deficiencies in the submission and may require substantial additional testing or information in order forthe FDA to reconsider the application. If and when those deficiencies have been addressed to the FDA's satisfaction in a resubmission of the NDA, theFDA will issue an approval letter. The FDA has committed to reviewing such resubmissions in two or six months depending on the type of informationincluded. Even with submission of this additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteriafor approval and refuse to approve the NDA.29Table of Contents Even if the FDA approves a product, it may limit the approved indications for use for the product, require that contraindications, warnings orprecautions be included in the product labeling, require that post-approval studies, including Phase 4 clinical trials, be conducted to further assess adrug's safety after approval, require testing and surveillance programs to monitor the product after commercialization, or impose other conditions,including distribution restrictions or other risk management mechanisms, which can materially affect the potential market and profitability of the product.The FDA may prevent or limit further marketing of a product based on the results of post-market studies or surveillance programs. After approval,some types of changes to the approved product, such as adding new indications, manufacturing changes and additional labeling claims, are subject tofurther testing requirements and FDA review and approval.Fast track designation The FDA is required to facilitate the development and expedite the review of drugs that are intended for the treatment of a serious or life-threatening condition for which there is no effective treatment and which demonstrate the potential to address unmet medical needs for the condition.Under the fast track program, the sponsor of a new drug candidate may request the FDA to designate the product for a specific indication as a fast trackproduct concurrent with or after the filing of the IND for the product candidate. The FDA must determine if the product candidate qualifies for fast trackdesignation within 60 days after receipt of the sponsor's request. In addition to other benefits, such as the ability to use surrogate endpoints and have greater interactions with the FDA, the FDA may initiate reviewof sections of a fast track product's NDA before the application is complete. This rolling review is available if the applicant provides and the FDAapproves a schedule for the submission of the remaining information and the applicant pays applicable user fees. However, the FDA's time period goalfor reviewing a fast track application does not begin until the last section of the NDA is submitted. In addition, the fast track designation may bewithdrawn by the FDA if the FDA believes that the designation is no longer supported by data emerging in the clinical trial process.Priority review Under FDA policies, a product candidate may be eligible for priority review, or review within a six-month time frame from the time a completeapplication is received. Products regulated by the FDA's Center for Drug Evaluation and Research, or CDER, are eligible for priority review if theyprovide a significant improvement compared to marketed products in the treatment, diagnosis or prevention of a disease. A fast track designated productcandidate would ordinarily meet the FDA's criteria for priority review.Accelerated approval Under the FDA's accelerated approval regulations, the FDA may approve a drug for a serious or life-threatening illness that provides meaningfultherapeutic benefit to patients over existing treatments based upon a surrogate endpoint that is reasonably likely to predict clinical benefit. In clinicaltrials, a surrogate endpoint is a measurement of laboratory or clinical signs of a disease or condition that substitutes for a direct measurement of how apatient feels, functions or survives. Surrogate endpoints can often be measured more easily or more rapidly than clinical endpoints. A product candidateapproved on this basis is subject to rigorous post-marketing compliance requirements, including the completion of Phase 4 or post-approval clinicaltrials to confirm the effect on the clinical endpoint. Failure to conduct required post-approval studies, or confirm a clinical benefit during post-marketingstudies, would allow the FDA to withdraw the drug from the market on an expedited basis. All promotional materials for drug candidates approvedunder accelerated regulations are subject to prior review by the FDA.30Table of ContentsOrphan drugs Under the Orphan Drug Act, the FDA may grant orphan drug designation to drugs intended to treat a rare disease or condition, which is generallydefined as a disease or condition that affects fewer than 200,000 individuals in the United States. Orphan drug designation must be requested beforesubmitting an NDA. After the FDA grants orphan drug designation, the generic identity of the drug and its potential orphan use are disclosed publiclyby the FDA. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process. Thefirst NDA applicant to receive FDA approval for a particular active ingredient to treat a particular disease with FDA orphan drug designation is entitledto a seven-year exclusive marketing period in the United States for that product, for that indication. During the seven-year exclusivity period, the FDAmay not approve any other applications to market the same drug for the same orphan indication, except in limited circumstances, such as a showing ofclinical superiority to the product with orphan drug exclusivity in that it is shown to be safer, more effective or makes a major contribution to patientcare. Orphan drug exclusivity does not prevent the FDA from approving a different drug for the same disease or condition, or the same drug for adifferent disease or condition. Among the other benefits of orphan drug designation are tax credits for certain research and a waiver of the NDAapplication user fee.Pediatric information Under the Pediatric Research Equity Act of 2003, as amended and reauthorized by the Food and Drug Administration Amendments Act of 2007,or the FDAAA, an NDA or supplement to an NDA must contain data that are adequate to assess the safety and effectiveness of the drug for the claimedindications in all relevant pediatric subpopulations, and to support dosing and administration for each pediatric subpopulation for which the product issafe and effective. The FDA may, on its own initiative or at the request of the applicant, grant deferrals for submission of some or all pediatric data untilafter approval of the product for use in adults, or full or partial waivers from the pediatric data requirements. Unless otherwise required by regulation,the pediatric data requirements do not apply to products with orphan drug designation.The Hatch-Waxman actAbbreviated new drug applications In seeking approval for a drug through an NDA, applicants are required to list with the FDA each patent with claims that cover the applicant'sproduct or a method of using the product. Upon approval of a drug, each of the patents listed in the application for the drug is then published in theFDA's Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the Orange Book. Drugs listed in the Orange Bookcan, in turn, be cited by potential competitors in support of approval of an abbreviated new drug application, or ANDA. Generally, an ANDA providesfor marketing of a drug product that has the same active ingredients in the same strengths, dosage form and route of administration as the listed drug andhas been shown to be bioequivalent through in vitro or in vivo testing or otherwise to the listed drug. ANDA applicants are not required to conduct orsubmit results of preclinical or clinical tests to prove the safety or effectiveness of their drug product, other than the requirement for bioequivalencetesting. Drugs approved in this way are commonly referred to as "generic equivalents" to the listed drug, and can often be substituted by pharmacistsunder prescriptions written for the original listed drug. The ANDA applicant is required to certify to the FDA concerning any patents listed for the approved product in the FDA's Orange Book, exceptfor patents covering methods of use for which the31Table of ContentsANDA applicant is not seeking approval. Specifically, the applicant must certify with respect to each patent that:•the required patent information has not been filed; •the listed patent has expired; •the listed patent has not expired, but will expire on a particular date and approval is sought after patent expiration; or •the listed patent is invalid, unenforceable or will not be infringed by the new product. A certification that the new product will not infringe the already approved product's listed patents or that such patents are invalid or unenforceableis called a Paragraph IV certification. If the applicant does not challenge the listed patents or indicate that it is not seeking approval of a patented methodof use, the ANDA application will not be approved until all the listed patents claiming the referenced product have expired. If the ANDA applicant has provided a Paragraph IV certification to the FDA, the applicant must also send notice of the Paragraph IV certificationto the NDA and patent holders once the ANDA has been accepted for filing by the FDA. The NDA and patent holders may then initiate a patentinfringement lawsuit in response to the notice of the Paragraph IV certification. The filing of a patent infringement lawsuit within 45 days after thereceipt of a Paragraph IV certification automatically prevents the FDA from approving the ANDA until the earlier of 30 months, expiration of thepatent, settlement of the lawsuit or a decision in the infringement case that is favorable to the ANDA applicant. The ANDA also will not be approved until any applicable non-patent exclusivity period, such as exclusivity for obtaining approval of a newchemical entity, for the referenced product has expired. Federal law provides a period of five years following approval of a drug containing nopreviously approved active moiety during which ANDAs for generic versions of those drugs cannot be submitted unless the submission contains aParagraph IV challenge to a listed patent, in which case the submission may be made four years following the original product approval. Federal lawprovides for a period of three years of exclusivity during which the FDA cannot grant effective approval of an ANDA if a listed drug contains apreviously approved active moiety, but FDA requires as a condition of approval new clinical trials conducted by or for the sponsor. This three-yearexclusivity period often protects changes to a previously approved drug product, such as a new dosage form, route of administration, combination orindication. Under the Best Pharmaceuticals for Children Act, federal law also provides that periods of patent and non-patent marketing exclusivity listedin the Orange Book for a drug may be extended by six months if the NDA sponsor conducts pediatric studies identified by the FDA in a writtenrequest. For written requests issued by the FDA after September 27, 2007, the date of enactment of the FDAAA, the FDA must grant pediatricexclusivity no later than nine months prior to the date of expiration of patent or non-patent exclusivity in order for the six-month pediatric extension toapply to that exclusivity period.Section 505(b)(2) new drug applications Most drug products obtain FDA marketing approval pursuant to an NDA or an ANDA. A third alternative is a special type of NDA, commonlyreferred to as a Section 505(b)(2) NDA, which enables the applicant to rely, in part, on the FDA's previous approval of a similar product, or publishedliterature, in support of its application. 505(b)(2) NDAs often provide an alternate path to FDA approval for new or improved formulations or new uses of previously approvedproducts. Section 505(b)(2) permits the filing of an NDA where at least some of the information required for approval comes from studies notconducted by or for the applicant and for which the applicant has not obtained a right of reference. If the32Table of Contents505(b)(2) applicant can establish that reliance on the FDA's previous approval is scientifically appropriate, it may eliminate the need to conduct certainpreclinical or clinical studies of the new product. The FDA may also require companies to perform additional studies or measurements to support thechange from the approved product. The FDA may then approve the new product candidate for all or some of the label indications for which thereferenced product has been approved, as well as for any new indication sought by the Section 505(b)(2) applicant. To the extent that the Section 505(b)(2) applicant is relying on studies conducted for an already approved product, the applicant is required tocertify to the FDA concerning any patents listed for the approved product in the Orange Book to the same extent that an ANDA applicant would. As aresult, approval of a 505(b)(2) NDA can be stalled until all the listed patents claiming the referenced product have expired, until any non-patentexclusivity, such as exclusivity for obtaining approval of a new chemical entity, listed in the Orange Book for the referenced product has expired, and,in the case of a Paragraph IV certification and subsequent patent infringement suit, until the earlier of 30 months, settlement of the lawsuit or a decisionin the infringement case that is favorable to the Section 505(b)(2) applicant.Combination products The FDA regulates combinations of products that cross FDA centers, such as drug, biologic or medical device components that are physically,chemically or otherwise combined into a single entity, as a combination product. The FDA center with primary jurisdiction for the combination productwill take the lead in the premarket review of the product, with the other center consulting or collaborating with the lead center. The FDA's Office of Combination Products, or OCP, determines which center will have primary jurisdiction for the combination product based onthe combination product's "primary mode of action." A mode of action is the means by which a product achieves an intended therapeutic effect or action.The primary mode of action is the mode of action that provides the most important therapeutic action of the combination product, or the mode of actionexpected to make the greatest contribution to the overall intended therapeutic effects of the combination product. Often it is difficult for the OCP to determine with reasonable certainty the most important therapeutic action of the combination product. In thosedifficult cases, the OCP will consider consistency with other combination products raising similar types of safety and effectiveness questions, or whichcenter has the most expertise to evaluate the most significant safety and effectiveness questions raised by the combination product. A sponsor may use a voluntary formal process, known as a Request for Designation, when the product classification is unclear or in dispute, toobtain a binding decision as to which center will regulate the combination product. If the sponsor objects to that decision, it may request that the agencyreconsider that decision.Overview of FDA regulation of companion diagnostics We are developing in vitro and in vivo companion diagnostics for use in selecting the patients that we believe will respond to our cancertherapeutics. FDA officials have issued draft guidance that, when finalized, would address issues critical to developing in vitro companion diagnostics, such asbiomarker qualification, establishing clinical validity, the use of retrospective data, the appropriate patient population and when the FDA will require thatthe device and the drug be approved simultaneously. The draft guidance issued in July 2011 states that if safe and effective use of a therapeutic productdepends on an in vitro diagnostic, then the FDA generally will require approval or clearance of the diagnostic at the same time that the FDA approves33Table of Contentsthe therapeutic product. The FDA has yet to issue further guidance, and it is unclear whether it will do so, or what the scope would be. The FDA previously has required in vitro companion diagnostics intended to select the patients who will respond to the cancer treatment to obtainPre-Market Approval, or PMA, simultaneously with approval of the drug. Based on the draft guidance, and the FDA's past treatment of companiondiagnostics, we believe that the FDA will require one or more of our in vitro companion diagnostics to obtain PMA for our companion diagnostics toidentify patient populations suitable for our cancer therapies, such as the in vitro companion diagnostic for our product candidates. The review of thesein vitro companion diagnostics in conjunction with the review of our cancer treatments involves coordination of review by CDER and by the FDA'sCenter for Devices and Radiological Health Office of In Vitro Diagnostics Device Evaluation and Safety.PMA approval pathway A medical device, including an in vitro diagnostic, or IVD, to be commercially distributed in the United States must receive either 510(k) clearanceor PMA approval from the FDA prior to marketing. Devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life supporting orimplantable devices, or devices deemed not substantially equivalent to a previously 510(k) cleared device or a preamendment class III device for whichPMA applications have not been called, are placed in Class III requiring PMA approval. The PMA approval pathway requires proof of the safety andeffectiveness of the device to the FDA's satisfaction. The PMA approval pathway generally takes from one to three years or even longer from submission of the application. A PMA application for an IVD must provide extensive preclinical and clinical trial data. Preclinical data for an IVD includes many different tests,including how reproducible the results are when the same sample is tested multiple times by multiple users at multiple laboratories. The clinical dataneed to establish that the test is sufficiently safe, effective and reliable in the intended use population. In addition, the FDA must be convinced that adevice has clinical utility, meaning that an IVD provides information that is clinically meaningful. A biomarker's clinical significance may be obvious, orthe applicant may be able to rely upon published literature or submit data to show clinical utility. A PMA application also must provide information about the device and its components regarding, among other things, device design,manufacturing and labeling. The sponsor must pay an application fee. As part of the PMA review, the FDA will typically inspect the manufacturer's facilities for compliance with Quality System Regulation, or QSR,requirements, which impose elaborate testing, control, documentation and other quality assurance procedures. Upon submission, the FDA determines if the PMA application is sufficiently complete to permit a substantive review, and, if so, the FDA acceptsthe application for filing. The FDA then commences an in-depth review of the PMA application. The entire process typically takes one to three years,but may take longer. The review time is often significantly extended as a result of the FDA asking for more information or clarification of informationalready provided. The FDA also may respond with a not approvable determination based on deficiencies in the application and require additional clinicaltrials that are often expensive and time-consuming and can substantially delay approval. During the review period, an FDA advisory committee, typically a panel of clinicians, may be convened to review the application and recommendto the FDA whether, or upon what conditions, the device should be approved. Although the FDA is not bound by the advisory panel decision, thepanel's recommendation is important to the FDA's overall decision making process.34Table of Contents If the FDA's evaluation of the PMA application is favorable, the FDA typically issues an approvable letter requiring the applicant's agreement tospecific conditions, such as changes in labeling, or specific additional information, such as submission of final labeling, in order to secure final approvalof the PMA. If the FDA concludes that the applicable criteria have been met, the FDA will issue a PMA for the approved indications, which can bemore limited than those originally sought by the manufacturer. The PMA can include post-approval conditions that the FDA believes necessary toensure the safety and effectiveness of the device, including, among other things, restrictions on labeling, promotion, sale and distribution. Failure tocomply with the conditions of approval can result in material adverse enforcement action, including the loss or withdrawal of the approval. Even after approval of a PMA, a new PMA or PMA supplement may be required in the event of a modification to the device, its labeling or itsmanufacturing process. Supplements to a PMA often require the submission of the same type of information required for an original PMA, except thatthe supplement is generally limited to the information needed to support the proposed change from the product covered by the original PMA.Clinical trials A clinical trial is almost always required to support a PMA application. In some cases, one or more smaller Investigational Device Exemption, orIDE, studies may precede a pivotal clinical trial intended to demonstrate the safety and efficacy of the investigational device. All clinical studies of investigational devices must be conducted in compliance with the FDA's requirements. If an investigational device couldpose a significant risk to patients pursuant to FDA regulations, the FDA must approve an IDE application prior to initiation of investigational use. IVDtrials usually do not require an IDE, as the FDA does not judge them to be a significant risk because the results do not affect the patients in the study.However, for a trial where the IVD result directs the therapeutic care of patients with cancer, we believe that the FDA would consider the investigationto present significant risk. An IDE application must be supported by appropriate data, such as laboratory test results, showing that it is safe to test the device in humans andthat the testing protocol is scientifically sound. The FDA typically grants IDE approval for a specified number of patients. A nonsignificant risk devicedoes not require FDA approval of an IDE. Both significant risk and nonsignificant risk investigational devices require approval from IRBs at the studycenters where the device will be used. During the trial, the sponsor must comply with the FDA's IDE requirements for investigator selection, trial monitoring, reporting and recordkeeping. The investigators must obtain patient informed consent, rigorously follow the investigational plan and study protocol, control the disposition ofinvestigational devices and comply with all reporting and record keeping requirements. Prior to granting PMA approval, the FDA typically inspects therecords relating to the conduct of the study and the clinical data supporting the PMA application for compliance with applicable requirements. Although the QSR does not fully apply to investigational devices, the requirement for controls on design and development does apply. Thesponsor also must manufacture the investigational device in conformity with the quality controls described in the IDE application and any conditions ofIDE approval that the FDA may impose with respect to manufacturing.Post-market After a device is on the market, numerous regulatory requirements apply. These requirements include: the QSR, labeling regulations, the FDA'sgeneral prohibition against promoting products for unapproved or "off label" uses, the Medical Device Reporting regulation, which requires thatmanufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likelycause or contribute to a death or serious injury if it35Table of Contentswere to recur, and the Reports of Corrections and Removals regulation, which requires manufacturers to report recalls and field actions to the FDA ifinitiated to reduce a risk to health posed by the device or to remedy a violation of the FDCA. The FDA enforces these requirements by inspection and market surveillance. If the FDA finds a violation, it can institute a wide variety ofenforcement actions, ranging from a public warning letter to more severe sanctions such as: fines, injunctions and civil penalties; recall or seizure ofproducts; operating restrictions, partial suspension or total shutdown of production; refusing requests for PMA approval of new products; withdrawingPMA approvals already granted; and criminal prosecution.Other regulatory requirements Any drug manufactured or distributed by us pursuant to FDA approvals are subject to pervasive and continuing regulation by the FDA, including,among other things, requirements relating to recordkeeping, periodic reporting, product sampling and distribution, advertising and promotion andreporting of adverse experiences with the product. After approval, most changes to the approved product, such as adding new indications or otherlabeling claims are subject to prior FDA review and approval. The FDA may impose a number of post-approval requirements as a condition of approval of an NDA. For example, the FDA may require post-marketing testing, including Phase 4 clinical trials, and surveillance to further assess and monitor the product's safety and effectiveness aftercommercialization. Regulatory approval of oncology products often requires that patients in clinical trials be followed for long periods to determine theoverall survival benefit of the drug. In addition, drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are required to register theirestablishments with the FDA and state agencies, and are subject to periodic unannounced inspections by the FDA and these state agencies forcompliance with cGMP requirements. Changes to the manufacturing process are strictly regulated and often require prior FDA approval before beingimplemented. FDA regulations also require investigation and correction of any deviations from cGMP and impose reporting and documentationrequirements upon us and any third-party manufacturers that we may decide to use. Accordingly, manufacturers must continue to expend time, moneyand effort in the areas of production and quality control to maintain cGMP compliance. Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements and standards is not maintained or ifproblems occur after the product reaches the market. Later discovery of previously unknown problems with a product, including adverse events ofunanticipated severity or frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may result in revisions to theapproved labeling to add new safety information, imposition of post-market studies or clinical trials to assess new safety risks or imposition ofdistribution or other restrictions under a Risk Evaluation and Mitigation Strategy program. Other potential consequences include, among other things:•restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from the market or product recalls; •fines, warning letters or holds on post-approval clinical trials; •refusal of the FDA to approve pending applications or supplements to approved applications, or suspension or revocation of productlicense approvals; •product seizure or detention, or refusal to permit the import or export of products; or •consent decrees, injunctions or the imposition of civil or criminal penalties.36Table of Contents The FDA strictly regulates marketing, labeling, advertising and promotion of products that are placed on the market. Drugs may be promoted onlyfor the approved indications and in accordance with the provisions of the approved label. The FDA and other agencies actively enforce the laws andregulations prohibiting the promotion of off label uses, and a company that is found to have improperly promoted off label uses may be subject tosignificant liability.Additional provisionsAnti-kickback and false claims laws In addition to FDA restrictions on marketing of pharmaceutical products, several other types of state and federal laws have been applied to restrictcertain marketing practices in the pharmaceutical industry in recent years. These laws include anti-kickback statutes and false claims statutes. The federalhealthcare program anti-kickback statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration toinduce or in return for purchasing, leasing, ordering or arranging for the purchase, lease or order of any healthcare item or service reimbursable underMedicare, Medicaid or other federally financed healthcare programs. This statute has been interpreted to apply to arrangements between pharmaceuticalmanufacturers on the one hand and prescribers, purchasers and formulary managers on the other. Violations of the anti-kickback statute are punishableby imprisonment, criminal fines, civil monetary penalties and exclusion from participation in federal healthcare programs. Although there are a numberof statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution or other regulatory sanctions, the exemptionsand safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchases or recommendations may besubject to scrutiny if they do not qualify for an exemption or safe harbor. Federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federalgovernment, or knowingly making, or causing to be made, a false statement to have a false claim paid. Recently, several pharmaceutical and otherhealthcare companies have been prosecuted under these laws for allegedly inflating drug prices they report to pricing services, which in turn were usedby the government to set Medicare and Medicaid reimbursement rates, and for allegedly providing free product to customers with the expectation thatthe customers would bill federal programs for the product. In addition, certain marketing practices, including off-label promotion, may also violate falseclaims laws. The majority of states also have statutes or regulations similar to the federal anti-kickback law and false claims laws, which apply to itemsand services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor.Physician drug samples As part of the sales and marketing process, pharmaceutical companies frequently provide samples of approved drugs to physicians. ThePrescription Drug Marketing Act, or the PDMA, imposes requirements and limitations upon the provision of drug samples to physicians, as well asprohibits states from licensing distributors of prescription drugs unless the state licensing program meets certain federal guidelines that includeminimum standards for storage, handling and record keeping. In addition, the PDMA sets forth civil and criminal penalties for violations.37Table of ContentsForeign regulation In order to market any product outside of the United States, we would need to comply with numerous and varying regulatory requirements of othercountries regarding safety and efficacy and governing, among other things, clinical trials, marketing authorization, commercial sales and distribution ofour products. Whether or not we obtain FDA approval for a product, we would need to obtain the necessary approvals by the comparable regulatoryauthorities of foreign countries before we can commence clinical trials or marketing of the product in those countries. The approval process varies fromcountry to country and can involve additional product testing and additional administrative review periods. The time required to obtain approval in othercountries might differ from and be longer than that required to obtain FDA approval. Regulatory approval in one country does not ensure regulatoryapproval in another, but a failure or delay in obtaining regulatory approval in one country may negatively impact the regulatory process in others. To date, we have not initiated any discussions with the European Medicines Agency or any other foreign regulatory authorities with respect toseeking regulatory approval for any of our products in Europe or in any other country outside the United States.New legislation and regulations From time to time, legislation is drafted, introduced and passed in Congress that could significantly change the statutory provisions governing thetesting, approval, manufacturing and marketing of products regulated by the FDA. For example, the FDAAA discussed above was enacted in 2007. Inaddition to new legislation, FDA regulations and policies are often revised or interpreted by the agency in ways that may significantly affect ourbusiness and our products. It is impossible to predict whether further legislative changes will be enacted or whether FDA regulations, guidance, policiesor interpretations changed or what the effect of such changes, if any, may be.Pharmaceutical coverage, pricing and reimbursement Significant uncertainty exists as to the coverage and reimbursement status of any drug products for which we obtain regulatory approval. Sales ofany of our product candidates, if approved, will depend, in part, on the extent to which the costs of the products will be covered by third-party payors,including government health programs such as Medicare and Medicaid, commercial health insurers and managed care organizations. The process fordetermining whether a payor will provide coverage for a drug product may be separate from the process for setting the price or reimbursement rate thatthe payor will pay for the drug product once coverage is approved. Third-party payors may limit coverage to specific drug products on an approved list,or formulary, which might not include all of the approved drugs for a particular indication. In order to secure coverage and reimbursement for any product that might be approved for sale, we may need to conduct expensivepharmacoeconomic studies in order to demonstrate the medical necessity and cost-effectiveness of the product, in addition to the costs required to obtainFDA or other comparable regulatory approvals. Our product candidates may not be considered medically necessary or cost-effective. A payor's decisionto provide coverage for a drug product does not imply that an adequate reimbursement rate will be approved. Third-party reimbursement may not besufficient to enable us to maintain price levels high enough to realize an appropriate return on our investment in product development. The containment of healthcare costs has become a priority of federal, state and foreign governments, and the prices of drugs have been a focus inthis effort. Third-party payors are increasingly challenging the prices charged for medical products and services and examining the medical necessityand cost-effectiveness of medical products and services, in addition to their safety and efficacy. If these third-party payors do not consider our productsto be cost-effective compared to other38Table of Contentsavailable therapies, they may not cover our products after approval as a benefit under their plans or, if they do, the level of payment may not besufficient to allow us to sell our products at a profit. The U.S. government, state legislatures and foreign governments have shown significant interest inimplementing cost containment programs to limit the growth of government-paid health care costs, including price controls, restrictions onreimbursement and requirements for substitution of generic products for branded prescription drugs. Adoption of such controls and measures, andtightening of restrictive policies in jurisdictions with existing controls and measures, could limit payments for pharmaceuticals such as the drugcandidates that we are developing and could adversely affect our net revenue and results. Pricing and reimbursement schemes vary widely from country to country. Some countries provide that drug products may be marketed only after areimbursement price has been agreed. Some countries may require the completion of additional studies that compare the cost-effectiveness of a particularproduct candidate to currently available therapies. For example, the European Union provides options for its member states to restrict the range of drugproducts for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use.European Union member states may approve a specific price for a drug product or may instead adopt a system of direct or indirect controls on theprofitability of the company placing the drug product on the market. Other member states allow companies to fix their own prices for drug products, butmonitor and control company profits. The downward pressure on health care costs in general, particularly prescription drugs, has become very intense.As a result, increasingly high barriers are being erected to the entry of new products. In addition, in some countries, cross-border imports from low-priced markets exert competitive pressure that may reduce pricing within a country. There can be no assurance that any country that has price controls orreimbursement limitations for drug products will allow favorable reimbursement and pricing arrangements for any of our products. The marketability of any products for which we receive regulatory approval for commercial sale may suffer if the government and third-partypayors fail to provide adequate coverage and reimbursement. In addition, an increasing emphasis on managed care in the United States has increasedand we expect will continue to increase the pressure on drug pricing. Coverage policies, third-party reimbursement rates and drug pricing regulationmay change at any time. In particular, the Patient Protection and Affordable Care Act was enacted in the United States in March 2010 and containprovisions that may reduce the profitability of drug products, including, for example, increased rebates for drugs sold to Medicaid programs, extensionof Medicaid rebates to Medicaid managed care plans, mandatory discounts for certain Medicare Part D beneficiaries and annual fees based onpharmaceutical companies' share of sales to federal health care programs. Even if favorable coverage and reimbursement status is attained for one ormore products for which we receive regulatory approval, less favorable coverage policies and reimbursement rates may be implemented in the future.EMPLOYEES As of March 8, 2013, we had 24 full-time employees, including a total of ten employees with M.D. or Ph.D. degrees. Of these full-timeemployees, 16 employees are engaged in research and development activities. None of our employees is represented by a labor union or covered by acollective bargaining agreement. We consider our relationship with our employees to be good.39Table of ContentsBUSINESS—EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth the name, age and position of each of our executive officers as of March 15, 2013. Christoph Westphal, M.D., Ph.D. has served as our Chief Executive Officer since September 2011. He served as our President from September2011 until January 2013. He has served on our board of directors since August 2010 and as the Chairman of our board of directors since March 2011.Dr. Westphal has served as a partner of Longwood Fund, LP, a venture capital investment fund, since 2010. He served as the President of SR One, thecorporate venture capital arm of GlaxoSmithKline, from 2010 until 2011. Dr. Westphal has previously been involved in founding a number ofbiotechnology companies as chief executive officer. Dr. Westphal co-founded Sirtris Pharmaceuticals, Inc., which was acquired byGlaxoSmithKline plc in 2008, and served as its Chief Executive Officer from 2004 to 2010. He also co-founded Alnara Pharmaceuticals, Inc.,Acceleron Pharma, Inc., serving as its Chief Executive Officer in 2003, Alnylam Pharmaceuticals, Inc., serving as its Chief Executive Officer in 2002,and Momenta Pharmaceuticals, Inc., serving as its Chief Executive Officer in 2001. Dr. Westphal serves on the Board of Fellows of Harvard MedicalSchool and the Board of Overseers for the Boston Symphony Orchestra and is a member of the Research Advisory Council at the MassachusettsGeneral Hospital. He earned his M.D. from Harvard Medical School, his Ph.D. in genetics from Harvard University and his B.A. from ColumbiaUniversity. Robert Forrester has served as our Chief Operating Officer since March 2011 and our President since January 2013. Mr. Forrester has previouslyheld executive level positions at both private and public life sciences companies. Prior to joining us, Mr. Forrester served as Chief Operating Officer ofForma Therapeutics, Inc. from 2010 until 2011. Previously he served as Interim President and Chief Executive Officer of CombinatoRx, Inc., nowZalicus Inc., from 2009 until 2010 and as its Executive Vice President and Chief Financial Officer from 2004 to 2009. Mr. Forrester served as SeniorVice President, Finance and Corporate Development at Coley Pharmaceuticals Group, Inc. from 2000 to 2003. He earned his LL.B. from BristolUniversity in England. Joanna Horobin, M.B., Ch.B. has served as our Chief Medical Officer since October 2012. Dr. Horobin has 30 years of pharmaceutical drugdevelopment experience. Prior to joining us, Dr. Horobin served as President of Syndax Pharmaceuticals from April 2012 to October 2012 andPresident and CEO from May 2006 to April 2012. At Syndax, Dr. Horobin designed and implemented the phase 2 clinical development of Entinostat inmetastatic breast and lung cancer. Previously, she served as VP, Oncology at Rhone-Poulenc Rorer (now Sanofi, NYSE: SNY), COO ofCombinatoRx (NASDAQ: CRXX, now ZLCS) and EVP at EntreMed with experience spanning clinical development, marketing, and generalmanagement in both public and private companies. At Rhone-Poulenc Rorer (now Sanofi, NYSE: SNY) Dr. Horobin led the global oncology business,including the successful global launch of Taxotere® (docetaxel) in breast cancer and Campto/Camptosar® (CPT11) for colorectal cancer. Dr. Horobinalso led a successful joint venture with Chugai to launch Granocyte® (lenograstim). Previously, Dr. Horobin played significant leadership roles in theapprovals of Lovenox®, Celectol®, Augmentin®, Timentin®, temocillin, Bactroban® and Relafen®/Reliflex®. Dr. Horobin received her medicaldegree from the University of Manchester, England. While in clinical practice she40Name Age PositionChristoph Westphal, M.D., Ph.D. 44 Chief Executive Officer and DirectorRobert Forrester 49 President, Chief Operating OfficerJoanna Horobin, M.B., Ch.B. 58 Chief Medical OfficerJonathan Pachter, Ph.D. 55 Vice President, Head of ResearchDaniel Paterson 52 Vice President, Head of CorporateDevelopment and DiagnosticsTable of Contentsgained membership to the Royal College of General Practitioners in the United Kingdom and holds a diploma of pharmaceutical medicine from theRoyal College of Physicians in the United Kingdom. Jonathan Pachter, Ph.D. has served as our Vice President, Head of Research since July 2011. Prior to joining us, Dr. Pachter served as the SeniorDirector of Cancer Biology at OSI Pharmaceuticals, Inc., which was acquired by Astellas Pharma Inc. in 2010, from 2005 to 2011. He earned hisPh.D. in Neuroscience and his M.S. in Pharmacology from Baylor College of Medicine. Dan Paterson has served as our Vice President, Head of Corporate Development and Diagnostics since March 2012. Prior to joining us,Mr. Paterson was a consultant in 2011 until joining us in 2012. From 2009 through 2010, Mr. Paterson was the COO of On-Q-ity. Mr. Paterson wasthe President and CEO of The DNA Repair Company from 2006 until 2009, when it was acquired by On-Q-ity. Previously, he held senior levelpositions at IMS Health, CareTools, OnCare and Axion.OUR CORPORATE INFORMATION We were incorporated under the laws of the State of Delaware in August 2010. Our principal executive offices are located at 215 First Street,Suite 440, Cambridge, Massachusetts 02142 and our telephone number is (617) 252-9300.ADDITIONAL INFORMATION We maintain a website at www.verastem.com. We make available, free of charge on our website, our annual report on Form 10-K, quarterlyreports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of theSecurities Exchange Act of 1934, as amended, or the Exchange Act, as soon as reasonably practicable after we electronically file those reports with, orfurnish them to, the Securities and Exchange Commission, or SEC. We also make available, free of charge on our website, the reports filed with theSEC by our executive officers, directors and 10% stockholders pursuant to Section 16 under the Exchange Act as soon as reasonably practicable aftercopies of those filings are provided to us by those persons. The information contained on, or that can be accessed through, our website is not a part ofor incorporated by reference in this annual report on Form 10-K.41Table of ContentsITEM 1A. Risk Factors.RISKS RELATED TO OUR FINANCIAL POSITION AND NEED FOR ADDITIONAL CAPITALWe have incurred significant losses since our inception. We expect to incur losses for the foreseeable future and may never achieve or maintainprofitability. Since inception, we have incurred significant operating losses. As of December 31, 2012, we had a deficit accumulated during the developmentstage of $46.5 million. To date, we have not generated any revenues and have financed our operations through private placements of our preferred stockand our initial public offering completed in February 2012. We have devoted substantially all of our efforts to research and development. We have onlyrecently initiated clinical development on one of our product candidates and expect that it will be many years, if ever, before we have a product candidateready for commercialization. We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. The netlosses we incur may fluctuate significantly from quarter to quarter. We anticipate that our expenses will increase substantially if and as we:•continue our research, preclinical and clinical development of our product candidates; •seek to identify additional product candidates that target cancer stem cells, or CSCs; •acquire or in-license other products and technologies; •initiate additional clinical trials for our product candidates; •seek marketing approvals for our product candidates that successfully complete clinical trials; •ultimately establish a sales, marketing and distribution infrastructure to commercialize any products for which we may obtain marketingapproval; •maintain, expand and protect our intellectual property portfolio; •hire additional clinical, quality control and scientific personnel; and •add operational, financial and management information systems and personnel, including personnel to support our product developmentand planned future commercialization efforts. To become and remain profitable, we must develop and eventually commercialize a product or products with significant market potential. This willrequire us to be successful in a range of challenging activities, including completing preclinical testing and clinical trials of our product candidates,obtaining marketing approval for these product candidates and manufacturing, marketing and selling those products for which we may obtain marketingapproval. We may never succeed in these activities and, even if we do, may never generate revenues that are significant or large enough to achieveprofitability. We are only in the early stages of clinical development. We recently initiated a Phase 1/1b trial of VS-6063 in combination with paclitaxelfor the treatment of advanced ovarian cancer. We are currently only in the preclinical testing stages for our other most advanced product candidates andhave not yet completed preclinical development of our other lead product candidates, VS-4718 and VS-5584. If we do achieve profitability, we may notbe able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would decrease the value of thecompany and could impair our ability to raise capital, maintain our research and development efforts, expand our business or continue our operations. Adecline in the value of our company could also cause you to lose all or part of your investment.Our short operating history may make it difficult for you to evaluate the success of our business to date and to assess our future viability. We are an early stage company. We commenced active operations in the second half of 2010. Our operations to date have been limited toorganizing and staffing our company, business planning, raising42Table of Contentscapital, acquiring and developing our technology, identifying potential product candidates and undertaking preclinical studies of our most advancedproduct candidates. We completed our initial public offering in February 2012. In January 2013, we initiated a Phase 1/1b trial of VS-6063. All ofour other product candidates are still in preclinical development. We have not yet demonstrated our ability to initiate or successfully complete any clinicaltrials, including large-scale, pivotal clinical trials, obtain marketing approvals, manufacture a commercial scale product, or arrange for a third party to doso on our behalf, or conduct sales and marketing activities necessary for successful product commercialization. It takes about ten to 15 years to developone new medicine from the time it is discovered to when it is available for treating patients. Consequently, any predictions you make about our futuresuccess or viability may not be as accurate as they could be if we had a longer operating history. In addition, as a new business, we may encounter unforeseen expenses, difficulties, complications, delays and other known and unknown factors.We will need to transition from a company with a research focus to a company capable of supporting commercial activities. We may not be successful insuch a transition.We will continue to need substantial additional funding. If we are unable to raise capital when needed, we would be forced to delay, reduce oreliminate our product development programs or commercialization efforts. We expect our expenses to increase in connection with our ongoing activities, particularly as we continue the research and development and initiateadditional clinical trials of, and seek marketing approval for, our product candidates. In addition, if we obtain marketing approval for any of our productcandidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. Accordingly,we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or onattractive terms, we would be forced to delay, reduce or eliminate our research and development programs or any future commercialization efforts. We expect our existing cash, cash equivalents and investments, will enable us to fund our current operating plan and capital expenditurerequirements into late 2015. Our future capital requirements will depend on many factors, including:•the scope, progress, results and costs of compound discovery, preclinical development, laboratory testing and clinical trials for ourproduct candidates; •the extent to which we acquire or in-license other products and technologies; •the costs, timing and outcome of regulatory review of our product candidates; •the costs of future commercialization activities, including product sales, marketing, manufacturing and distribution, for any of ourproduct candidates for which we receive marketing approval; •revenue, if any, received from commercial sales of our product candidates, should any of our product candidates receive marketingapproval; •the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defendingintellectual property-related claims; and •our ability to establish collaborations on favorable terms, if at all. Identifying potential product candidates and conducting preclinical testing and clinical trials is a time-consuming, expensive and uncertain processthat takes years to complete, and we may never generate the necessary data or results required to obtain marketing approval and achieve product sales. Inaddition, our product candidates, if approved, may not achieve commercial success. Our commercial43Table of Contentsrevenues, if any, will be derived from sales of products that we do not expect to be commercially available for many years, if at all. Accordingly, we willneed to continue to rely on additional financing to achieve our business objectives. Adequate additional financing may not be available to us onacceptable terms, or at all.Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish rights to our technologies orproduct candidates. Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equityofferings, debt financings, collaborations, strategic alliances and licensing arrangements. We do not have any committed external source of funds. To theextent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our existing stockholders will bediluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing stockholders. Debtfinancing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurringadditional debt, making capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquishvaluable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not befavorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce orterminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwiseprefer to develop and market ourselves.RISKS RELATED TO THE DISCOVERY, DEVELOPMENT AND COMMERCIALIZATION OF OUR PRODUCT CANDIDATESOur approach to the discovery and development of product candidates that target CSCs is unproven, and we do not know whether we will be ableto develop any products of commercial value. Our scientific approach focuses on using proprietary technology to create a stable population of CSCs in the laboratory that we then use to screenfor and identify product candidates targeting these CSCs. Research on CSCs is an emerging field and, consequently, there is ongoing debate regardingthe existence of CSCs, whether the appropriate nomenclature to refer to these cells is cancer stem cells, tumor-initiating cells or another term and theimportance of these cells as an underlying cause of tumor recurrence and metastasis. Although there is general consensus that some cancer cells have tumor-initiating capacity, there also is some debate in the scientific communityregarding the defining characteristics of these cells, which we call CSCs, and the origin of these cells. Some believe that normal adult stem cells mutateand transform into CSCs. Others believe that all cancer cells have tumor-initiating capabilities, these capabilities cannot be attributed to a factor intrinsicto a particular cell and, therefore, a definitive CSC cannot be isolated or targeted. We believe that the discovery by our scientific co-founders of the linkbetween the epithelial-to-mesenchymal transition, or EMT, and the emergence of cancer stem cells is one way a cancer cell can transition to a CSC, butthis view is not universally accepted. Even if our beliefs regarding the existence, characteristics and function of CSCs are correct, any drugs that we develop may not effectively targetCSCs. We do not believe that any drugs that target CSCs have been successfully developed to date for the treatment of cancer. If we are able to developa drug that targets CSCs in preclinical studies, we may nonetheless not succeed in demonstrating safety and efficacy of the drug in human clinical trials.Our focus on using our proprietary technology to44Table of Contentsscreen for and identify product candidates targeting CSCs may not result in the discovery and development of commercially viable drugs to treat cancer.We may not be successful in our efforts to identify or discover additional potential product candidates. A key element of our strategy is to identify and test additional compounds that target CSCs in a variety of different types of cancer. A significantportion of the research that we are conducting involves new compounds, new uses of existing compounds and new and unproven drug discoverymethods, including our proprietary technology. The drug discovery that we are conducting using our EMT technology may not be successful inidentifying compounds that are useful in treating cancer. Our research programs may initially show promise in identifying potential product candidates,yet fail to yield product candidates for clinical development for a number of reasons, including:•the research methodology used may not be successful in identifying potential product candidates; or •potential product candidates may, on further study, be shown to have harmful side effects or other characteristics that indicate that theyare unlikely to be products that will receive marketing approval and achieve market acceptance. In particular, because our EMT technology induces the EMT process to create a stable population of CSCs, it is possible that these stable CSCsmay not react in precisely the same manner as naturally occurring CSCs when treated with a particular product candidate. As a result, a productcandidate that shows initial promise in targeting our stable population of CSCs may not have the same effect on tumors with naturally occurring CSCs. Research programs to identify new product candidates require substantial technical, financial and human resources. We may choose to focus ourefforts and resources on a potential product candidate that ultimately proves to be unsuccessful. If we are unable to identify suitable compounds for preclinical and clinical development, we will not be able to obtain product revenues in futureperiods, which likely would result in significant harm to our financial position and adversely impact our stock price.We may not be successful in obtaining necessary rights to compounds and product candidates for our development pipeline through acquisitionsand in-licenses. Because we are screening a range of compounds, including compounds with proprietary rights held by third parties, for their activity againstCSCs, the growth of our business will depend in significant part on our ability to acquire or in-license rights to these compounds. However, we may beunable to acquire or in-license any compounds or product candidates from third parties that we identify using our proprietary EMT technology orotherwise. The licensing and acquisition of proprietary compounds is a competitive area, and a number of more established companies are also pursuingstrategies to license or acquire compounds and product candidates that we may consider attractive. These established companies may have a competitiveadvantage over us due to their size, cash resources and greater clinical development and commercialization capabilities. The Whitehead Institute and affiliated parties have retained the right to use the EMT technology that we license from it for research, teaching andeducational purposes and could seek to license to third parties any intellectual property rights that it discovers using the EMT technology while pursuingthese purposes. Pursuant to our drug discovery platform license agreement with the Whitehead Institute, we will have an opportunity, subject to theWhitehead Institute's obligations under any third-party research funding agreements, to negotiate a license to any such intellectual property under thedrug discovery platform license agreement that is developed or conceived on or prior to a specified date in Robert Weinberg's laboratory at theWhitehead Institute. Our failure to reach an agreement45Table of Contentswith either the Broad Institute or the Whitehead Institute for any applicable intellectual property could result in a third party acquiring the related rights. In addition, companies that perceive us to be a competitor may be unwilling to assign or license rights to us. We also may be unable to license oracquire the relevant compound or product candidate on terms that would allow us to make an appropriate return on our investment. In addition, weexpect competition for acquisition and in-licensing product candidates that are attractive to us may increase in the future, especially if our approach oftargeting CSCs gains greater scientific acceptance, which may mean fewer suitable opportunities for us as well as higher acquisition or licensing prices.If we are unable to successfully obtain rights to suitable compounds or product candidates, our business, financial condition and prospects for growthcould suffer.Preclinical testing and clinical trials of our product candidates may not be successful. If we are unable to commercialize our product candidates orexperience significant delays in doing so, our business will be materially harmed. We have invested a significant portion of our efforts and financial resources in the identification and preclinical development of drugs that targetCSCs. In January 2013, we initiated our first clinical trial of one of our product candidates, VS-6063. Our other lead product candidates are still inpreclinical development. Our ability to generate product revenues, which we do not expect will occur for many years, if ever, will depend heavily on thesuccessful development and eventual commercialization of our product candidates. The success of our product candidates will depend on severalfactors, including the following:•successful completion of preclinical studies and clinical trials; •receipt of marketing approvals from applicable regulatory authorities; •establishing commercial manufacturing capabilities or making arrangements with third-party manufacturers; •obtaining and maintaining patent and trade secret protection and regulatory exclusivity for our product candidates; •launching commercial sales of the products, if and when approved, whether alone or in collaboration with others; •acceptance of the products, if and when approved, by patients, the medical community and third-party payors; •effectively competing with other therapies; and •a continued acceptable safety profile of the products following approval. If we do not achieve one or more of these factors in a timely manner or at all, we could experience significant delays or an inability to successfullycommercialize our product candidates, which would materially harm our business.46Table of ContentsIf clinical trials of our product candidates fail to demonstrate safety and efficacy to the satisfaction of regulatory authorities or do not otherwiseproduce positive results, we may incur additional costs or experience delays in completing, or ultimately be unable to complete, the developmentand commercialization of our product candidates. Before obtaining marketing approval from regulatory authorities for the sale of our product candidates, we must complete extensive clinical trials todemonstrate the safety and efficacy of our product candidates in humans. Clinical testing is expensive, difficult to design and implement, can take manyyears to complete and is uncertain as to outcome. A failure of one or more clinical trials can occur at any stage of testing. The outcome of preclinicaltesting and early clinical trials may not be predictive of the success of later clinical trials, and interim results of a clinical trial do not necessarily predictfinal results. Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that have believedtheir product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval of theirproducts. For example, standard measures of clinical activity with respect to solid tumors, such as Response Criteria in Solid Tumors, or RECIST,measurement guidelines, which are based on gross changes in the size of tumor lesions, may not be sufficient to detect the targeting of CSCs by ourproduct candidates. We may experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent our ability to receive marketingapproval or commercialize our product candidates, including:•regulators or institutional review boards may not authorize us or our investigators to commence a clinical trial or conduct a clinical trial ata prospective trial site; •we may have delays in reaching or fail to reach agreement on acceptable clinical trial contracts or clinical trial protocols with prospectivetrial sites; •clinical trials of our product candidates may produce negative or inconclusive results, and we may decide, or regulators may require us,to conduct additional clinical trials or abandon product development programs; •the number of patients required for clinical trials of our product candidates may be larger than we anticipate, enrollment in these clinicaltrials may be slower than we anticipate or participants may drop out of these clinical trials at a higher rate than we anticipate; •our third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner,or at all; •we might have to suspend or terminate clinical trials of our product candidates for various reasons, including a finding that theparticipants are being exposed to unacceptable health risks; •regulators or institutional review boards may require that we or our investigators suspend or terminate clinical research for variousreasons, including noncompliance with regulatory requirements or a finding that the participants are being exposed to unacceptable healthrisks; •the cost of clinical trials of our product candidates may be greater than we anticipate; •the supply or quality of our product candidates or other materials necessary to conduct clinical trials of our product candidates may beinsufficient or inadequate; and •our product candidates may have undesirable side effects or other unexpected characteristics, causing us or our investigators, regulatorsor institutional review boards to suspend or terminate the trials.47Table of Contents If we are required to conduct additional clinical trials or other testing of our product candidates beyond those that we currently contemplate, if weare unable to successfully complete clinical trials of our product candidates or other testing, if the results of these trials or tests are not positive or areonly modestly positive or if there are safety concerns, we may:•be delayed in obtaining marketing approval for our product candidates; •not obtain marketing approval at all; •obtain approval for indications or patient populations that are not as broad as intended or desired; •obtain approval with labeling that includes significant use or distribution restrictions or safety warnings, including boxed warnings; •be subject to additional post-marketing testing requirements; or •have the product removed from the market after obtaining marketing approval. Our product development costs will also increase if we experience delays in testing or marketing approvals. We do not know whether any clinicaltrials will begin as planned, will need to be restructured or will be completed on schedule, or at all. Significant clinical trial delays also could shorten anyperiods during which we may have the exclusive right to commercialize our product candidates or allow our competitors to bring products to marketbefore we do and impair our ability to successfully commercialize our product candidates and may harm our business and results of operations.If we experience delays or difficulties in the enrollment of patients in clinical trials, our receipt of necessary regulatory approvals could be delayedor prevented. We may not be able to initiate or continue clinical trials for our product candidates if we are unable to locate and enroll a sufficient number ofeligible patients to participate in these trials as required by the U.S. Food and Drug Administration, or FDA, or similar regulatory authorities outside theUnited States. In addition, many of our competitors have ongoing clinical trials for product candidates that treat the same indications as our productcandidates, and patients who would otherwise be eligible for our clinical trials may instead enroll in clinical trials of our competitors' product candidates. Patient enrollment is affected by other factors including:•severity of the disease under investigation; •eligibility criteria for the study in question; •perceived risks and benefits of the product candidate under study; •efforts to facilitate timely enrollment in clinical trials; •patient referral practices of physicians; •the ability to monitor patients adequately during and after treatment; and •proximity and availability of clinical trial sites for prospective patients. Our inability to enroll a sufficient number of patients for our clinical trials would result in significant delays or may require us to abandon one ormore clinical trials altogether. Enrollment delays in our clinical trials may result in increased development costs for our product candidates, which wouldcause the value of our company to decline and limit our ability to obtain additional financing.48Table of ContentsIf serious adverse or inappropriate side effects are identified during the development of our product candidates, we may need to abandon or limitour development of some of our product candidates. All of our product candidates are in preclinical development or early stages of clinical development and their risk of failure is high. It is impossibleto predict when or if any of our product candidates will prove effective or safe in humans or will receive marketing approval. If our product candidatesare associated with undesirable side effects or have characteristics that are unexpected, we may need to abandon their development or limit developmentto certain uses or subpopulations in which the undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from arisk-benefit perspective. Many compounds that initially showed promise in early stage testing for treating cancer have later been found to cause sideeffects that prevented further development of the compound.We may expend our limited resources to pursue a particular product candidate or indication and fail to capitalize on product candidates orindications that may be more profitable or for which there is a greater likelihood of success. Because we have limited financial and managerial resources, we focus on research programs and product candidates that we identify for specificindications. As a result, we may forego or delay pursuit of opportunities with other product candidates or for other indications that later prove to havegreater commercial potential. Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable marketopportunities. Our spending on current and future research and development programs and product candidates for specific indications may not yield anycommercially viable products. If we do not accurately evaluate the commercial potential or target market for a particular product candidate, we mayrelinquish valuable rights to that product candidate through collaboration, licensing or other royalty arrangements in cases in which it would have beenmore advantageous for us to retain sole development and commercialization rights to such product candidate.If we are unable to successfully develop companion diagnostics for our therapeutic product candidates, or experience significant delays in doingso, we may not realize the full commercial potential of our therapeutics. We plan to develop companion diagnostics for our therapeutic product candidates. There has been limited success to date industry wide indeveloping these types of companion diagnostics. To be successful, we would need to address a number of scientific, technical and logistical challenges.We have only recently initiated development of companion diagnostics. We have limited experience in the development of diagnostics and may not besuccessful in developing appropriate diagnostics to pair with any of our therapeutic product candidates that receive marketing approval. Companiondiagnostics are subject to regulation by the FDA and similar regulatory authorities outside the United States as medical devices and require separateregulatory approval prior to commercialization. Given our limited experience in developing diagnostics, we expect to rely in part on third parties for theirdesign and manufacture. For example, we entered into an agreement with Laboratory Corporation of America Holdings to assist us in validatingbiomarkers for VS-6063 in the development of an applicable companion diagnostic. If we or any third parties that we engage to assist us, are unable tosuccessfully develop companion diagnostics for our therapeutic product candidates, or experience delays in doing so:•the development of our therapeutic product candidates may be adversely affected if we are unable to appropriately select patients forenrollment in our clinical trials; •our therapeutic product candidates may not receive marketing approval if safe and effective use of a therapeutic product candidatedepends on an in vitro diagnostic; and49Table of Contents•we may not realize the full commercial potential of any therapeutics that receive marketing approval if, among other reasons, we areunable to appropriately select patients who are likely to benefit from therapy with our drugs. As a result, our business would be harmed, possibly materially.Even if any of our product candidates receive marketing approval, they may fail to achieve the degree of market acceptance by physicians, patients,healthcare payors and others in the medical community necessary for commercial success. If any of our product candidates receive marketing approval, they may nonetheless fail to gain sufficient market acceptance by physicians, patients,healthcare payors and others in the medical community. For example, current cancer treatments like chemotherapy and radiation therapy are wellestablished in the medical community, and doctors may continue to rely on these treatments. If our product candidates do not achieve an adequate levelof acceptance, we may not generate significant product revenues and we may not become profitable. The degree of market acceptance of our productcandidates, if approved for commercial sale, will depend on a number of factors, including:•efficacy and potential advantages compared to alternative treatments; •the ability to offer our products for sale at competitive prices; •convenience and ease of administration compared to alternative treatments; •the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies; •the strength of marketing and distribution support; •sufficient third-party coverage or reimbursement; and •the prevalence and severity of any side effects.If, in the future, we are unable to establish sales and marketing capabilities or enter into agreements with third parties to sell and market ourproduct candidates, we may not be successful in commercializing our product candidates if and when they are approved. We do not have a sales or marketing infrastructure and have no experience in the sale, marketing or distribution of pharmaceutical products. Toachieve commercial success for any approved product, we must either develop a sales and marketing organization or outsource these functions to thirdparties. In the future, we may choose to build a focused sales and marketing infrastructure to market or co-promote some of our product candidates ifand when they are approved. There are risks involved with both establishing our own sales and marketing capabilities and entering into arrangements with third parties toperform these services. For example, recruiting and training a sales force is expensive and time consuming and could delay any product launch. If thecommercial launch of a product candidate for which we recruit a sales force and establish marketing capabilities is delayed or does not occur for anyreason, we would have prematurely or unnecessarily incurred these commercialization expenses. This may be costly, and our investment would be lostif we cannot retain or reposition our sales and marketing personnel. Factors that may inhibit our efforts to commercialize our products on our own include:•our inability to recruit and retain adequate numbers of effective sales and marketing personnel; •the inability of sales personnel to obtain access to physicians or persuade adequate numbers of physicians to prescribe any futureproducts;50Table of Contents•the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative tocompanies with more extensive product lines; and •unforeseen costs and expenses associated with creating an independent sales and marketing organization. If we enter into arrangements with third parties to perform sales, marketing and distribution services, our product revenues or the profitability ofthese product revenues to us are likely to be lower than if we were to market and sell any products that we develop ourselves. In addition, we may notbe successful in entering into arrangements with third parties to sell and market our product candidates or may be unable to do so on terms that arefavorable to us. We likely will have little control over such third parties, and any of them may fail to devote the necessary resources and attention to selland market our products effectively. If we do not establish sales and marketing capabilities successfully, either on our own or in collaboration with thirdparties, we will not be successful in commercializing our product candidates.We face substantial competition, which may result in others discovering, developing or commercializing products before or more successfully thanwe do. The development and commercialization of new drug products is highly competitive. We face competition with respect to our current productcandidates, and will face competition with respect to any product candidates that we may seek to develop or commercialize in the future, from majorpharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide. There are a number of large pharmaceuticaland biotechnology companies that currently market and sell products or are pursuing the development of products for the treatment of the diseaseindications for which we are developing our product candidates. Some of these competitive products and therapies are based on scientific approachesthat are the same as or similar to our approach, and others are based on entirely different approaches. Potential competitors also include academicinstitutions, government agencies and other public and private research organizations that conduct research, seek patent protection and establishcollaborative arrangements for research, development, manufacturing and commercialization. We are developing our product candidates for the treatment of cancer. There are a variety of available therapies marketed for cancer. In many cases,these drugs are administered in combination to enhance efficacy. Some of these drugs are branded and subject to patent protection, and others areavailable on a generic basis. Many of these approved drugs are well established therapies and are widely accepted by physicians, patients and third-partypayors. Insurers and other third-party payors may also encourage the use of generic products. We expect that if our product candidates are approved,they will be priced at a significant premium over competitive generic products. This may make it difficult for us to achieve our business strategy ofusing our product candidates in combination with existing therapies or replacing existing therapies with our product candidates. There are also a number of products in clinical development by third parties to treat cancer by targeting CSCs. These companies include divisionsof large pharmaceutical companies, including Astellas Pharma US, Inc., Sanofi-Aventis US LLC, GlaxoSmithKline plc, Boehringer Ingelheim GmbH,Pfizer Inc. and others. There are also biotechnology companies of various sizes that are developing therapies against CSCs, including OncoMedPharmaceuticals, Inc., Boston Biomedical, Inc. and Stemline Therapeutics, Inc. Our competitors may develop products that are more effective, safer,more convenient or less costly than any that we are developing or that would render our product candidates obsolete or non-competitive. In addition, ourcompetitors may discover biomarkers that more efficiently measure CSCs than our methods, which may give them a competitive advantage indeveloping potential products. Our competitors may also obtain marketing approval from the FDA or other regulatory51Table of Contentsauthorities for their products more rapidly than we may obtain approval for ours, which could result in our competitors establishing a strong marketposition before we are able to enter the market. Many of our competitors have significantly greater financial resources and expertise in research and development, manufacturing, preclinicaltesting, conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do. Mergers and acquisitions in thepharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number of our competitors. Smallerand other early stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and establishedcompanies. These third parties compete with us in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sitesand patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs.Even if we are able to commercialize any product candidates, the products may become subject to unfavorable pricing regulations, third-partyreimbursement practices or healthcare reform initiatives, which would harm our business. The regulations that govern marketing approvals, pricing and reimbursement for new drug products vary widely from country to country. In theUnited States, recently passed legislation may significantly change the approval requirements in ways that could involve additional costs and causedelays in obtaining approvals. Some countries require approval of the sale price of a drug before it can be marketed. In many countries, the pricingreview period begins after marketing or product licensing approval is granted. In some foreign markets, prescription pharmaceutical pricing remainssubject to continuing governmental control even after initial approval is granted. As a result, we might obtain marketing approval for a product in aparticular country, but then be subject to price regulations that delay our commercial launch of the product, possibly for lengthy time periods, andnegatively impact the revenues we are able to generate from the sale of the product in that country. Adverse pricing limitations may hinder our ability torecoup our investment in one or more product candidates, even if our product candidates obtain marketing approval. Our ability to commercialize any products successfully also will depend in part on the extent to which reimbursement for these products and relatedtreatments will be available from government health administration authorities, private health insurers and other organizations. Government authoritiesand third-party payors, such as private health insurers and health maintenance organizations, decide which medications they will pay for and establishreimbursement levels. A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and third-party payorshave attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. Increasingly, third-party payors arerequiring that drug companies provide them with predetermined discounts from list prices and are challenging the prices charged for medical products.We cannot be sure that reimbursement will be available for any product that we commercialize and, if reimbursement is available, the level ofreimbursement. Reimbursement may impact the demand for, or the price of, any product candidate for which we obtain marketing approval. Obtainingreimbursement for our products may be particularly difficult because of the higher prices often associated with drugs administered under the supervisionof a physician. If reimbursement is not available or is available only to limited levels, we may not be able to successfully commercialize any productcandidate for which we obtain marketing approval. There may be significant delays in obtaining reimbursement for newly approved drugs, and coverage may be more limited than the purposes forwhich the drug is approved by the FDA or similar regulatory authorities outside the United States. Moreover, eligibility for reimbursement does notimply that any drug will be paid for in all cases or at a rate that covers our costs, including research, development, manufacture, sale and distribution.Interim reimbursement levels for new drugs, if applicable, may also not be sufficient to cover our costs and may not be made permanent.52Table of ContentsReimbursement rates may vary according to the use of the drug and the clinical setting in which it is used, may be based on reimbursement levelsalready set for lower cost drugs and may be incorporated into existing payments for other services. Net prices for drugs may be reduced by mandatorydiscounts or rebates required by government healthcare programs or private payors and by any future relaxation of laws that presently restrict imports ofdrugs from countries where they may be sold at lower prices than in the United States. Third-party payors often rely upon Medicare coverage policyand payment limitations in setting their own reimbursement policies. Our inability to promptly obtain coverage and profitable payment rates from bothgovernment-funded and private payors for any approved products that we develop could have a material adverse effect on our operating results, ourability to raise capital needed to commercialize products and our overall financial condition.Product liability lawsuits against us could cause us to incur substantial liabilities and to limit commercialization of any products that we maydevelop. We face an inherent risk of product liability exposure related to the testing of our product candidates in human clinical trials and will face an evengreater risk if we commercially sell any products that we may develop. If we cannot successfully defend ourselves against claims that our productcandidates or products caused injuries, we will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:•decreased demand for any product candidates or products that we may develop; •injury to our reputation and significant negative media attention; •withdrawal of clinical trial participants; •significant costs to defend the related litigation; •substantial monetary awards to trial participants or patients; •loss of revenue; and •the inability to commercialize any products that we may develop. We currently hold $5.0 million in product liability insurance coverage in the aggregate, with a per incident limit of $5.0 million, which may not beadequate to cover all liabilities that we may incur. We may need to increase our insurance coverage as we initiate additional clinical trials or upon thecommercialization of our product candidates, if ever. Insurance coverage is increasingly expensive. We may not be able to maintain insurance coverageat a reasonable cost or in an amount adequate to satisfy any liability that may arise.If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur costs thatcould have a material adverse effect on the success of our business. We are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and thehandling, use, storage, treatment and disposal of hazardous materials and wastes. Our operations involve the use of hazardous and flammable materials,including chemicals and biological materials. Our operations also produce hazardous waste products. We generally contract with third parties for thedisposal of these materials and wastes. We cannot eliminate the risk of contamination or injury from these materials. In the event of contamination orinjury resulting from our use of hazardous materials, we could be held liable for any resulting damages, and any liability could exceed our resources.We also could incur significant costs associated with civil or criminal fines and penalties. Although we maintain workers' compensation insurance to cover us for costs and expenses we may incur due to injuries to our employeesresulting from the use of hazardous materials, this insurance53Table of Contentsmay not provide adequate coverage against potential liabilities. We do not maintain insurance for environmental liability or toxic tort claims that may beasserted against us in connection with our storage or disposal of biological, hazardous or radioactive materials. In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. Thesecurrent or future laws and regulations may impair our research, development or production efforts. Failure to comply with these laws and regulationsalso may result in substantial fines, penalties or other sanctions.RISKS RELATED TO OUR DEPENDENCE ON THIRD PARTIESWe may depend on collaborations with third parties for the development and commercialization of our product candidates. If those collaborationsare not successful, we may not be able to capitalize on the market potential of these product candidates. We may seek third-party collaborators for the development and commercialization of our product candidates. Our likely collaborators for anycollaboration arrangements include large and mid-size pharmaceutical companies, regional and national pharmaceutical companies and biotechnologycompanies. If we do enter into any such arrangements with any third parties, we will likely have limited control over the amount and timing of resourcesthat our collaborators dedicate to the development or commercialization of our product candidates. Our ability to generate revenues from thesearrangements will depend on our collaborators' abilities to successfully perform the functions assigned to them in these arrangements. Collaborations involving our product candidates would pose the following risks to us:•collaborators have significant discretion in determining the efforts and resources that they will apply to these collaborations; •collaborators may not pursue development and commercialization of our product candidates or may elect not to continue or renewdevelopment or commercialization programs based on clinical trial results, changes in the collaborator's strategic focus or availablefunding or external factors such as an acquisition that diverts resources or creates competing priorities; •collaborators may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial or abandon a productcandidate, repeat or conduct new clinical trials or require a new formulation of a product candidate for clinical testing; •collaborators could independently develop, or develop with third parties, products that compete directly or indirectly with our products orproduct candidates if the collaborators believe that competitive products are more likely to be successfully developed or can becommercialized under terms that are more economically attractive than ours; •a collaborator with marketing and distribution rights to one or more products may not commit sufficient resources to the marketing anddistribution of such product or products; •collaborators may not properly maintain or defend our intellectual property rights or may use our proprietary information in such a wayas to invite litigation that could jeopardize or invalidate our proprietary information or expose us to potential litigation; •disputes may arise between the collaborators and us that result in the delay or termination of the research, development orcommercialization of our products or product candidates or that result in costly litigation or arbitration that diverts management attentionand resources; and •collaborations may be terminated and, if terminated, may result in a need for additional capital to pursue further development orcommercialization of the applicable product candidates.54Table of Contents Collaboration agreements may not lead to development or commercialization of product candidates in the most efficient manner or at all. If apresent or future collaborator of ours were to be involved in a business combination, the continued pursuit and emphasis on our product development orcommercialization program could be delayed, diminished or terminated.If we are not able to establish collaborations, we may have to alter our development and commercialization plans. Our drug development programs and the potential commercialization of our product candidates will require substantial additional cash to fundexpenses. For some of our product candidates, we may decide to collaborate with pharmaceutical and biotechnology companies for the development andpotential commercialization of those product candidates. We face significant competition in seeking appropriate collaborators. Whether we reach a definitive agreement for a collaboration will depend,among other things, upon our assessment of the collaborator's resources and expertise, the terms and conditions of the proposed collaboration and theproposed collaborator's evaluation of a number of factors. Those factors may include the design or results of clinical trials, the likelihood of approval bythe FDA or similar regulatory authorities outside the United States, the potential market for the subject product candidate, the costs and complexities ofmanufacturing and delivering such product candidate to patients, the potential of competing products, the existence of uncertainty with respect to ourownership of technology, which can exist if there is a challenge to such ownership without regard to the merits of the challenge and industry and marketconditions generally. The collaborator may also consider alternative product candidates or technologies for similar indications that may be available tocollaborate on and whether such a collaboration could be more attractive than the one with us for our product candidate. We may also be restricted underexisting license agreements from entering into agreements on certain terms with potential collaborators. Collaborations are complex and time-consumingto negotiate and document. In addition, there have been a significant number of recent business combinations among large pharmaceutical companiesthat have resulted in a reduced number of potential future collaborators. We may not be able to negotiate collaborations on a timely basis, on acceptable terms, or at all. If we are unable to do so, we may have to curtail thedevelopment of such product candidate, reduce or delay its development program or one or more of our other development programs, delay its potentialcommercialization or reduce the scope of any sales or marketing activities, or increase our expenditures and undertake development or commercializationactivities at our own expense. If we elect to increase our expenditures to fund development or commercialization activities on our own, we may need toobtain additional capital, which may not be available to us on acceptable terms or at all. If we do not have sufficient funds, we may not be able to furtherdevelop our product candidates or bring them to market and generate product revenue.We expect to rely on third parties to conduct our clinical trials and some aspects of our compound formulation research and preclinical testing,and those third parties may not perform satisfactorily, including failing to meet deadlines for the completion of such trials, research or testing. We do not plan to independently conduct all aspects of clinical trials of our product candidates. In addition, we do not expect to independentlyconduct all aspects of our compound formulation research or preclinical testing of our product candidates. We expect to rely on third parties, such ascontract research organizations, clinical data management organizations, medical institutions and clinical investigators, to conduct our clinical trials. Forexample, we currently rely on third parties in the development of various formulations of VS-5584 and VS-4718. We cannot finish preclinical testingand initiate clinical trials of these product candidates until the development of a formulation is complete. Any of these third parties may terminate theirengagements with us at any time. If we need to enter into alternative arrangements, it would delay our product development activities.55Table of Contents Our reliance on these third parties for research and development activities will reduce our control over these activities but will not relieve us of ourresponsibilities. For example, we will remain responsible for ensuring that each of our clinical trials is conducted in accordance with the generalinvestigational plan and protocols for the trial. Moreover, the FDA requires us to comply with standards, commonly referred to as Good ClinicalPractices, for conducting, recording and reporting the results of clinical trials to assure that data and reported results are credible and accurate and thatthe rights, integrity and confidentiality of trial participants are protected. We also are required to register ongoing clinical trials and post the results ofcompleted clinical trials on a government-sponsored database, ClinicalTrials.gov, within certain timeframes. Failure to do so can result in fines, adversepublicity and civil and criminal sanctions. Furthermore, these third parties may also have relationships with other entities, some of which may be our competitors. If these third parties do notsuccessfully carry out their contractual duties, meet expected deadlines or conduct our clinical trials in accordance with regulatory requirements or ourstated protocols, we will not be able to obtain, or may be delayed in obtaining, marketing approvals for our product candidates and will not be able to, ormay be delayed in our efforts to, successfully commercialize our product candidates. We also expect to rely on other third parties to store and distribute drug supplies for our clinical trials. Any performance failure on the part of ourdistributors could delay clinical development or marketing approval of our product candidates or commercialization of our products, producingadditional losses and depriving us of potential product revenue.We contract with third parties for the manufacture of our product candidates for preclinical testing and expect to continue to do so for clinicaltrials and for commercialization. This reliance on third parties increases the risk that we will not have sufficient quantities of our productcandidates or products or such quantities at an acceptable cost, which could delay, prevent or impair our development or commercializationefforts. We do not have any manufacturing facilities or personnel. We currently rely, and expect to continue to rely, on third-party manufacturers for themanufacture of our product candidates for preclinical testing, other than small amounts of compounds that we may synthesize ourselves for suchpurpose. To date, we have obtained starting materials for our supply of the cGMP bulk drug substances for our product candidates from third-partymanufacturers. We do not have a long term supply agreement with any of these third-party manufacturers, and we purchase our required drug supply ona purchase order basis. We currently obtain all of our supply of VS-6063 for clinical development from Pfizer. We expect to rely on third-party manufacturers or third-party collaborators for the manufacture of our product candidates for clinical trials and for commercial supply of any of these product candidates forwhich we or our collaborators obtain marketing approval. We may be unable to establish any agreements with third-party manufacturers or to do so onacceptable terms. Even if we are able to establish agreements with third-party manufacturers, reliance on third-party manufacturers entails additionalrisks, including:•reliance on the third party for regulatory compliance and quality assurance; •the possible breach of the manufacturing agreement by the third party; and •the possible termination or nonrenewal of the agreement by the third party at a time that is costly or inconvenient for us. Third-party manufacturers may not be able to comply with current good manufacturing practices, or cGMP, regulations or similar regulatoryrequirements outside the United States. Our failure, or the failure of our third-party manufacturers, to comply with applicable regulations could result insanctions being imposed on us, including fines, injunctions, civil penalties, delays, suspension or withdrawal of approvals, license revocation, seizuresor recalls of product candidates or products, operating56Table of Contentsrestrictions and criminal prosecutions, any of which could significantly and adversely affect supplies of our products and harm our business and resultsof operations. Any products that we may develop may compete with other product candidates and products for access to manufacturing facilities. There are alimited number of manufacturers that operate under cGMP regulations and that might be capable of manufacturing for us. Any performance failure on the part of our existing or future manufacturers could delay clinical development or marketing approval. We do notcurrently have arrangements in place for redundant supply or a second source for bulk drug substance. If our current contract manufacturer cannotperform as agreed, we may be required to replace that manufacturer. Although we believe that there are several potential alternative manufacturers whocould manufacture our product candidates, we may incur added costs and delays in identifying and qualifying any such replacement. Our current and anticipated future dependence upon others for the manufacture of our product candidates or products may adversely affect ourfuture profit margins and our ability to commercialize any products that receive marketing approval on a timely and competitive basis.RISKS RELATED TO OUR INTELLECTUAL PROPERTYIf we fail to comply with our obligations under our intellectual property licenses with third parties, we could lose license rights that are importantto our business. We are a party to a number of intellectual property license agreements with third parties, including the Whitehead Institute, PoniardPharmaceuticals, Inc., or Poniard, and Pfizer, Inc., or Pfizer, and expect to enter into additional license agreements in the future. In particular, we haveexclusively licensed rights to our most advanced product candidate, VS-6063, from Pfizer. Our existing license agreements impose, and we expect thatfuture license agreements will impose, various diligence, milestone payment, royalty, insurance and other obligations on us. For example, under ourlicense agreements with the Whitehead Institute, Poniard, and Pfizer, we are required to use commercially reasonable efforts to develop andcommercialize licensed products under the agreement and to satisfy other specified obligations. If we fail to comply with our obligations under theselicenses, our licensors may have the right to terminate these license agreements, in which event we might not be able to market any product that iscovered by these agreements, or to convert the exclusive licenses to non-exclusive licenses, which could materially adversely affect the value of theproduct candidate being developed under these license agreements. Termination of these license agreements or reduction or elimination of our licensedrights may result in our having to negotiate new or reinstated licenses with less favorable terms. If the Whitehead Institute were to terminate its drugdiscovery platform license agreement with us for any reason, we would lose access to the EMT technology and the ability to use the stable population ofCSCs for high-throughput screening. If Poniard were to terminate its license agreement with us for any reason, we would lose our rights to VS-4718. IfPfizer were to terminate its license agreement with us for any reason, we would lose our rights to VS-6063, which is our lead product candidate.If we are unable to obtain and maintain patent protection for our technology and products, or if our licensors are unable to obtain and maintainpatent protection for the technology or products that we license from them, or if the scope of the patent protection obtained is not sufficientlybroad, our competitors could develop and commercialize technology and products similar or identical to ours, and our ability to successfullycommercialize our technology and products may be adversely affected. Our success depends in large part on our and our licensors' ability to obtain and maintain patent protection in the United States and other countrieswith respect to our proprietary technology and products. We and our licensors seek to protect our proprietary position by filing patent applications in theUnited States and abroad related to our novel technologies and products that are important to our57Table of Contentsbusiness. We cannot be certain that any patents will issue with claims that cover our proprietary technology or product candidates. The patent prosecution process is expensive and time-consuming, and we may not be able to file and prosecute all necessary or desirable patentapplications at a reasonable cost or in a timely manner. It is also possible that we will fail to identify patentable aspects of our research and developmentoutput before it is too late to obtain patent protection. Moreover, in some circumstances, we do not have the right to control the preparation, filing andprosecution of patent applications, or to maintain the patents, covering technology or products that we license from third parties and are reliant on ourlicensors. For example, we do not control the prosecution of the patent applications licensed to us under our agreements with the Whitehead Institute orthose patent applications owned by The Scripps Research Institute, or Scripps, licensed to us under our agreement with Poniard. Therefore, we cannotbe certain that these patents and applications will be prosecuted and enforced in a manner consistent with the best interests of our business. If suchlicensors fail to maintain such patents, or lose rights to those patents, the rights we have licensed may be reduced or eliminated. The patent position of biotechnology and pharmaceutical companies generally is highly uncertain, involves complex legal and factual questions andhas in recent years been the subject of much litigation. As a result, the issuance, scope, validity, enforceability and commercial value of our and ourlicensors' patent rights are highly uncertain. Our and our licensors' pending and future patent applications may not result in patents being issued whichprotect our technology or products or which effectively prevent others from commercializing competitive technologies and products. Changes in eitherthe patent laws or interpretation of the patent laws in the United States and other countries may diminish the value of our patents or narrow the scope ofour patent protection. The laws of foreign countries may not protect our rights to the same extent as the laws of the United States. Publications of discoveries in thescientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not publisheduntil 18 months after filing, or in some cases not at all. Therefore we cannot be certain that we or our licensors were the first to make the inventionsclaimed in our owned or licensed patents or pending patent applications, or that we or our licensors were the first to file for patent protection of suchinventions. Assuming the other requirements for patentability are met, currently, in the United States, the first to make the claimed invention is entitled to thepatent, while outside the United States, the first to file a patent application is entitled to the patent. In March 2013, the United States will transition to afirst inventor to file system in which, assuming the other requirements for patentability are met, the first inventor to file a patent application will beentitled to the patent. We may be subject to a third party preissuance submission of prior art to the U.S. Patent and Trademark Office, or becomeinvolved in opposition, derivation, reexamination, inter parties review or interference proceedings challenging our patent rights or the patent rights ofothers. An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate, our patent rights, allow thirdparties to commercialize our technology or products and compete directly with us, without payment to us, or result in our inability to manufacture orcommercialize products without infringing third-party patent rights.58Table of Contents Even if our owned and licensed patent applications issue as patents, they may not issue in a form that will provide us with any meaningfulprotection, prevent competitors from competing with us or otherwise provide us with any competitive advantage. Our competitors may be able tocircumvent our owned or licensed patents by developing similar or alternative technologies or products in a non-infringing manner. The issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, and our owned and licensed patents may bechallenged in the courts or patent offices in the United States and abroad. Such challenges may result in loss of exclusivity or freedom to operate or inpatent claims being narrowed, invalidated or held unenforceable, which could limit our ability to stop others from using or commercializing similar oridentical technology and products, or limit the duration of the patent protection of our technology and products. Given the amount of time required forthe development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after suchcandidates are commercialized. As a result, our owned and licensed patent portfolio may not provide us with sufficient rights to exclude others fromcommercializing products similar or identical to ours.We may become involved in lawsuits to protect or enforce our patents, which could be expensive, time consuming and unsuccessful. Competitors may infringe our patents. To counter infringement or unauthorized use, we may be required to file infringement claims, which can beexpensive and time consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours is invalid or unenforceable, or mayrefuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverseresult in any litigation proceeding could put one or more of our patents at risk of being invalidated or interpreted narrowly. Furthermore, because of thesubstantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information couldbe compromised by disclosure during this type of litigation. In addition, our licensors may have rights to file and prosecute such claims and we arereliant on them.Third parties may initiate legal proceedings alleging that we are infringing their intellectual property rights, the outcome of which would beuncertain and could have a material adverse effect on the success of our business. Our commercial success depends upon our ability and the ability of our collaborators to develop, manufacture, market and sell our productcandidates and use our proprietary technologies without infringing the proprietary rights of third parties. We have yet to conduct comprehensivefreedom-to-operate searches to determine whether our use of certain of the patent rights owned by or licensed to us would infringe patents issued tothird parties. We may become party to, or threatened with, future adversarial proceedings or litigation regarding intellectual property rights with respectto our products and technology, including interference proceedings before the U.S. Patent and Trademark Office. Third parties may assert infringementclaims against us based on existing patents or patents that may be granted in the future. If we are found to infringe a third party's intellectual propertyrights, we could be required to obtain a license from such third party to continue developing and marketing our products and technology. However, wemay not be able to obtain any required license on commercially reasonable terms or at all. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. We could be forced, including by court order, to ceasecommercializing the infringing technology or product. In addition, we could be found liable for monetary damages. A finding of infringement couldprevent us from commercializing our product candidates or force us to cease some of our business operations, which could materially59Table of Contentsharm our business. Claims that we have misappropriated the confidential information or trade secrets of third parties could have a similar negativeimpact on our business. For example, we are aware of a U.S. patent application filed by a third party almost one year after the priority date of the U.S. patent applicationfiled by Scripps and licensed to us by Poniard, which has pending generic claims that, if issued as written, potentially cover VS-4718. The third-partypatent application also specifically discloses VS-4718. Although the Scripps patent application has a priority date that is earlier than the priority date ofthe third-party application, we cannot be sure which party was the first to make the claimed invention. Because the United States currently uses a first toinvent standard to determine priority, if a patent issues under the third-party patent application covering the composition of matter of VS-4718 and suchthird party was determined to be the first to make the claimed invention, we would need to obtain a license to the patented technology to commercializeVS-4718 in the United States, which would cause us to incur licensing related costs. However, a license to this patent might not be available oncommercially reasonable terms, or at all. Our failure to obtain a license to any such patent could delay or prevent our potential commercialization of VS-4718 in the United States.We may be subject to claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers. Many of our employees were previously employed at universities or other biotechnology or pharmaceutical companies, including our competitorsor potential competitors. Although we try to ensure that our employees do not use the proprietary information or know-how of others in their work forus, we may be subject to claims that we or these employees have used or disclosed intellectual property, including trade secrets or other proprietaryinformation, of any such employee's former employer. Litigation may be necessary to defend against these claims. If we fail in defending any suchclaims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in defendingagainst such claims, litigation could result in substantial costs and be a distraction to management.Intellectual property litigation could cause us to spend substantial resources and distract our personnel from their normal responsibilities. Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses,and could distract our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of theresults of hearings, motions or other interim proceedings or developments and if securities analysts or investors perceive these results to be negative, itcould have a substantial adverse effect on the price of our common stock. Such litigation or proceedings could substantially increase our operatinglosses and reduce the resources available for development activities or any future sales, marketing or distribution activities. We may not have sufficientfinancial or other resources to adequately conduct such litigation or proceedings. Some of our competitors may be able to sustain the costs of suchlitigation or proceedings more effectively than we can because of their greater financial resources. Uncertainties resulting from the initiation andcontinuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace.If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed. In addition to seeking patents for some of our technology and products, we also rely on trade secrets, including unpatented know-how, technologyand other proprietary information, to maintain our competitive position. We seek to protect these trade secrets, in part, by entering into non-disclosureand confidentiality agreements with parties who have access to them, such as our employees, corporate60Table of Contentscollaborators, outside scientific collaborators, contract manufacturers, consultants, advisors and other third parties. We also enter into confidentiality andinvention or patent assignment agreements with our employees and consultants. Despite these efforts, any of these parties may breach the agreementsand disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Enforcing aclaim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. Inaddition, some courts inside and outside the United States are less willing or unwilling to protect trade secrets. If any of our trade secrets were to belawfully obtained or independently developed by a competitor, we would have no right to prevent them from using that technology or information tocompete with us. If any of our trade secrets were to be disclosed to or independently developed by a competitor, our competitive position would beharmed.RISKS RELATED TO REGULATORY APPROVAL OF OUR PRODUCT CANDIDATES AND OTHER LEGAL COMPLIANCEMATTERSIf we are not able to obtain, or if there are delays in obtaining, required regulatory approvals, we will not be able to commercialize our productcandidates, and our ability to generate revenue will be materially impaired. Our product candidates and the activities associated with their development and commercialization, including their design, testing, manufacture,safety, efficacy, recordkeeping, labeling, storage, approval, advertising, promotion, sale and distribution, are subject to comprehensive regulation by theFDA and other regulatory agencies in the United States and by comparable authorities in other countries. Failure to obtain marketing approval for aproduct candidate will prevent us from commercializing the product candidate. We have not received approval to market any of our product candidatesfrom regulatory authorities in any jurisdiction. We have only limited experience in filing and supporting the applications necessary to gain marketingapprovals and expect to rely on third-party contract research organizations to assist us in this process. Securing FDA approval requires the submissionof extensive preclinical and clinical data and supporting information to the FDA for each therapeutic indication to establish the product candidate's safetyand efficacy. Securing FDA approval also requires the submission of information about the product manufacturing process to, and inspection ofmanufacturing facilities by, the FDA. Our product candidates may not be effective, may be only moderately effective or may prove to have undesirableor unintended side effects, toxicities or other characteristics that may preclude our obtaining marketing approval or prevent or limit commercial use. The process of obtaining marketing approvals, both in the United States and abroad, is expensive, may take many years if additional clinical trialsare required, if approval is obtained at all, and can vary substantially based upon a variety of factors, including the type, complexity and novelty of theproduct candidates involved. Changes in marketing approval policies during the development period, changes in or the enactment of additional statutesor regulations, or changes in regulatory review for each submitted product application, may cause delays in the approval or rejection of an application.The FDA has substantial discretion in the approval process and may refuse to accept any application or may decide that our data is insufficient forapproval and require additional preclinical, clinical or other studies. In addition, varying interpretations of the data obtained from preclinical and clinicaltesting could delay, limit or prevent marketing approval of a product candidate. Any marketing approval we ultimately obtain may be limited or subjectto restrictions or post-approval commitments that render the approved product not commercially viable. If we experience delays in obtaining approval or if we fail to obtain approval of our product candidates, the commercial prospects for our productcandidates may be harmed and our ability to generate revenues will be materially impaired.61Table of ContentsFailure to obtain marketing approval in international jurisdictions would prevent our product candidates from being marketed abroad. In order to market and sell our products in the European Union and many other jurisdictions, we or our third-party collaborators must obtainseparate marketing approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and caninvolve additional testing. The time required to obtain approval may differ substantially from that required to obtain FDA approval. The regulatoryapproval process outside the United States generally includes all of the risks associated with obtaining FDA approval. In addition, in many countriesoutside the United States, it is required that the product be approved for reimbursement before the product can be approved for sale in that country. Weor these third parties may not obtain approvals from regulatory authorities outside the United States on a timely basis, if at all. Approval by the FDAdoes not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one regulatory authority outside the United Statesdoes not ensure approval by regulatory authorities in other countries or jurisdictions or by the FDA. We may not be able to file for marketing approvalsand may not receive necessary approvals to commercialize our products in any market.We have applied for orphan disease status for VS-6063 for Mesothelioma in the United States and the European Union, but there can be noassurance that we will receive orphan drug designation in any jurisdiction or that we will be able to prevent third parties from developing andcommercializing products that are competitive to VS-6063. We filed for orphan drug designation in the U.S. and the EU for the use of VS-6063 in mesothelioma. If VS-6063 is designated as an orphan drugand then obtains marketing authorization, it will receive orphan drug exclusivity. Orphan drug exclusivity grants seven years of marketing exclusivityunder the Federal Food, Drug and Cosmetic Act and up to 10 years of marketing exclusivity in Europe. We cannot assure that we will receive orphandrug designation in any jurisdiction, and a competitor may receive orphan drug marketing authorization prior to us for the same indication for which weare developing VS-6063. Other companies have received orphan drug designations for compounds other than VS-6063 for mesothelioma in the U.S.and EU. While the orphan drug exclusivity for VS-6063 would, if granted, provide market exclusivity in the U.S., Europe, and other countries, wewould not be able to exclude other companies from manufacturing and/or selling drugs using the same active ingredient for the same indication beyondthat timeframe on the basis of orphan drug designation. Furthermore, the marketing exclusivity in Europe can be reduced from 10 years to six years ifthe initial designation criteria have significantly changed since the market authorization of the orphan medicinal product. Even if we were to receiveorphan drug designation for a particular drug indication, we cannot guarantee that another company also with orphan drug designation will not receivemarketing authorization for the same indication before we do. If that were to happen, our applications for that indication may not be approved until thecompeting company's period of exclusivity has expired. Even if we are the first to obtain marketing authorization for an orphan drug indication, there arecircumstances under which a competing product may be approved for the same indication during the seven-year period of marketing exclusivity, such asif the later product is shown to be clinically superior to our product, or if the later product is a different drug than VS-6063. Further, the seven-yearmarketing exclusivity would not prevent competitors from obtaining approval of the same compound for other indications or the use of other types ofdrugs for the same use as the orphan drug.Any product candidate for which we obtain marketing approval could be subject to restrictions or withdrawal from the market and we may besubject to penalties if we fail to comply with regulatory requirements or if we experience unanticipated problems with our products, when and ifany of them are approved. Any product candidate for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical data, labeling,advertising and promotional activities for such product,62Table of Contentswill be subject to continual requirements of and review by the FDA and other regulatory authorities. These requirements include submissions of safetyand other post-marketing information and reports, registration and listing requirements, cGMP requirements relating to quality control, quality assuranceand corresponding maintenance of records and documents, requirements regarding the distribution of samples to physicians and recordkeeping. Even ifmarketing approval of a product candidate is granted, the approval may be subject to limitations on the indicated uses for which the product may bemarketed or to the conditions of approval, or contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy ofthe product. The FDA closely regulates the post-approval marketing and promotion of drugs to ensure drugs are marketed only for the approvedindications and in accordance with the provisions of the approved labeling. The FDA imposes stringent restrictions on manufacturers' communicationsregarding off-label use and if we do not market our products for their approved indications, we may be subject to enforcement action for off-labelmarketing. In addition, later discovery of previously unknown problems with our products, manufacturers or manufacturing processes, or failure to complywith regulatory requirements, may yield various results, including:•restrictions on such products, manufacturers or manufacturing processes; •restrictions on the labeling or marketing of a product; •restrictions on product distribution or use; •requirements to conduct post-marketing clinical trials; •warning or untitled letters; •withdrawal of the products from the market; •refusal to approve pending applications or supplements to approved applications that we submit; •recall of products; •fines, restitution or disgorgement of profits or revenue; •suspension or withdrawal of marketing approvals; •refusal to permit the import or export of our products; •product seizure; or •injunctions or the imposition of civil or criminal penalties.Our relationships with customers and third-party payors will be subject to applicable anti-kickback, fraud and abuse and other healthcare lawsand regulations, which could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits andfuture earnings. Healthcare providers, physicians and third-party payors play a primary role in the recommendation and prescription of any product candidates forwhich we obtain marketing approval. Our future arrangements with third-party payors and customers may expose us to broadly applicable fraud andabuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which we market,sell and distribute our products for which we obtain marketing approval. Restrictions under applicable federal and state healthcare laws and regulations,include the following:•the federal healthcare anti-kickback statute prohibits, among other things, persons from knowingly and willfully soliciting, offering,receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for,or the63Table of Contentspurchase, order or recommendation of, any good or service, for which payment may be made under federal and state healthcareprograms such as Medicare and Medicaid;•the federal False Claims Act imposes criminal and civil penalties, including civil whistleblower or qui tam actions, against individuals orentities for knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulentor making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government; •the federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology forEconomic and Clinical Health Act, imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit programand also imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmissionof individually identifiable health information; •the federal false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making anymaterially false statement in connection with the delivery of or payment for healthcare benefits, items or services; •the federal transparency requirements under the Health Care Reform Law requires manufacturers of drugs, devices, biologics andmedical supplies to report to the Department of Health and Human Services information related to physician payments and othertransfers of value and physician ownership and investment interests; and •analogous state laws and regulations, such as state anti-kickback and false claims laws, may apply to sales or marketing arrangementsand claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers, andsome state laws require pharmaceutical companies to comply with the pharmaceutical industry's voluntary compliance guidelines and therelevant compliance guidance promulgated by the federal government in addition to requiring drug manufacturers to report informationrelated to payments to physicians and other health care providers or marketing expenditures. Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involvesubstantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes,regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation ofany of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrativepenalties, damages, fines, exclusion from government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuringof our operations. If any of the physicians or other providers or entities with whom we expect to do business are found to be not in compliance withapplicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs.Recently enacted and future legislation may increase the difficulty and cost for us to obtain marketing approval of and commercialize our productcandidates and affect the prices we may obtain. In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changesregarding the healthcare system that could prevent or delay marketing approval of our product candidates, restrict or regulate post-approval activities andaffect our ability to profitably sell any product candidates for which we obtain marketing approval. In the United States, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or Medicare Modernization Act, changed theway Medicare covers and pays for pharmaceutical products. The legislation expanded Medicare coverage for drug purchases by the elderly andintroduced64Table of Contentsa new reimbursement methodology based on average sales prices for physician administered drugs. In addition, this legislation provided authority forlimiting the number of drugs that will be covered in any therapeutic class. Cost reduction initiatives and other provisions of this legislation coulddecrease the coverage and price that we receive for any approved products. While the Medicare Modernization Act applies only to drug benefits forMedicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates.Therefore, any reduction in reimbursement that results from the Medicare Modernization Act may result in a similar reduction in payments from privatepayors. More recently, in March 2010, President Obama signed into law the Health Care Reform Law, a sweeping law intended to broaden access tohealth insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirementsfor health care and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms. EffectiveOctober 1, 2010, the Health Care Reform Law revises the definition of "average manufacturer price" for reporting purposes, which could increase theamount of Medicaid drug rebates to states. Further, the new law imposes a significant annual fee on companies that manufacture or import brandedprescription drug products. Substantial new provisions affecting compliance have also been enacted, which may affect our business practices withhealth care practitioners. We will not know the full effects of the Health Care Reform Law until applicable federal and state agencies issue regulations orguidance under the new law. Although it is too early to determine the effect of the Health Care Reform Law, the new law appears likely to continue thepressure on pharmaceutical pricing, especially under the Medicare program, and may also increase our regulatory burdens and operating costs. Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional activities forpharmaceutical products. We cannot be sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance orinterpretations will be changed, or what the impact of such changes on the marketing approvals of our product candidates, if any, may be. In addition,increased scrutiny by the U.S. Congress of the FDA's approval process may significantly delay or prevent marketing approval, as well as subject us tomore stringent product labeling and post-marketing testing and other requirements.RISKS RELATED TO EMPLOYEE MATTERS AND MANAGING GROWTHOur future success depends on our ability to retain our chief executive officer and other key executives and to attract, retain and motivate qualifiedpersonnel. We are highly dependent on Christoph Westphal, our Chief Executive Officer, Robert Forrester, our President and Chief Operating Officer, andJoanna Horobin, our Chief Medical Officer, as well as the other principal members of our management and scientific teams, including our scientific co-founders, Robert Weinberg and Eric Lander. Although we have formal employment agreements with Christoph Westphal, Robert Forrester and JoannaHorobin, these agreements do not prevent them from terminating their employment with us at any time. We do not maintain "key person" insurance forany of our executives or other employees. The loss of the services of any of these persons could impede the achievement of our research, developmentand commercialization objectives. In addition to his role as Chairman of the board of directors and Chief Executive Officer of our company, Dr. Westphal also serves as a generalpartner of Longwood Fund, LP, a venture capital investment fund and one of our principal stockholders. We and Dr. Westphal anticipate that he willtransition to an executive Chairman role at our company in the future based on our having meaningfully advanced our discovery, research anddevelopment efforts, the overall growth of our company and our identifying and hiring a suitable successor. In connection with Dr. Westphal'stransition to this role, we will need to recruit and hire a new principal executive officer. Our inability to hire a suitable executive to assume this positionin a timely fashion could delay the execution of our business plans or disrupt our operations.65Table of Contents Recruiting and retaining qualified scientific, clinical, manufacturing and sales and marketing personnel will also be critical to our success. We maynot be able to attract and retain these personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnologycompanies for similar personnel. We also experience competition for the hiring of scientific and clinical personnel from universities and researchinstitutions. In addition, we rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our research anddevelopment and commercialization strategy. Our consultants and advisors, including our scientific co-founders, may be employed by employers otherthan us and may have commitments under consulting or advisory contracts with other entities that may limit their availability to us.We expect to expand our development, regulatory and future sales and marketing capabilities, and as a result, we may encounter difficulties inmanaging our growth, which could disrupt our operations. We expect to experience significant growth in the number of our employees and the scope of our operations, particularly in the areas of drugdevelopment, regulatory affairs and sales and marketing. To manage our anticipated future growth, we must continue to implement and improve ourmanagerial, operational and financial systems, expand our facilities and continue to recruit and train additional qualified personnel. Due to our limitedfinancial resources and the limited experience of our management team in managing a company with such anticipated growth, we may not be able toeffectively manage the expansion of our operations or recruit and train additional qualified personnel. The physical expansion of our operations maylead to significant costs and may divert our management and business development resources. Any inability to manage growth could delay the executionof our business plans or disrupt our operations.RISKS RELATED TO OUR COMMON STOCKOur executive officers, directors and principal stockholders maintain the ability to control all matters submitted to stockholders for approval. As of December 31, 2012, our executive officers, directors and stockholders who owned more than 5% of our outstanding common stock, in theaggregate, beneficially owned shares representing approximately 53% of our capital stock. As a result, if these stockholders chose to act together, theywould be able to control all matters submitted to our stockholders for approval, as well as our management and affairs. For example, these persons, ifthey chose to act together, would control the election of directors and approval of any merger, consolidation or sale of all or substantially all of ourassets. This concentration of voting power could delay or prevent an acquisition of our company on terms that other stockholders may desire.Provisions in our corporate charter documents and under Delaware law could make an acquisition of us, which may be beneficial to ourstockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management. Provisions in our corporate charter and our bylaws may discourage, delay or prevent a merger, acquisition or other change in control of us thatstockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions couldalso limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of ourcommon stock. In addition, because our board of directors is responsible for appointing the members of our management team, these provisions mayfrustrate or prevent any attempts by our stockholders to replace or remove our current management by making it66Table of Contentsmore difficult for stockholders to replace members of our board of directors. Among other things, these provisions:•establish a classified board of directors such that not all members of the board are elected at one time; •allow the authorized number of our directors to be changed only by resolution of our board of directors; •limit the manner in which stockholders can remove directors from the board; •establish advance notice requirements for stockholder proposals that can be acted on at stockholder meetings and nominations to ourboard of directors; •require that stockholder actions must be effected at a duly called stockholder meeting and prohibit actions by our stockholders by writtenconsent; •limit who may call stockholder meetings; •authorize our board of directors to issue preferred stock without stockholder approval, which could be used to institute a "poison pill"that would work to dilute the stock ownership of a potential hostile acquirer, effectively preventing acquisitions that have not beenapproved by our board of directors; and •require the approval of the holders of at least 75% of the votes that all our stockholders would be entitled to cast to amend or repealcertain provisions of our charter or bylaws. Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law,which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three yearsafter the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination isapproved in a prescribed manner.The market price of our common stock has been, and may continue to be, highly volatile. Our stock price has been volatile. Since January 27, 2012, when we became a public company, the price for one share of our common stock hasreached a high of $12.24 and a low of $6.25. We cannot predict whether the price of our common stock will rise or fall. The market price for ourcommon stock may be influenced by many factors, including:•the success of competitive products or technologies; •results of clinical trials of our product candidates or those of our competitors; •regulatory or legal developments in the United States and other countries; •developments or disputes concerning patent applications, issued patents or other proprietary rights; •the recruitment or departure of key personnel; •the level of expenses related to any of our product candidates or clinical development programs; •the results of our efforts to discover, develop, acquire or in-license additional product candidates or products; •actual or anticipated changes in estimates as to financial results, development timelines or recommendations by securities analysts; •variations in our financial results or those of companies that are perceived to be similar to us;67Table of Contents•changes in the structure of healthcare payment systems; •market conditions in the pharmaceutical and biotechnology sectors; •general economic, industry and market conditions; and •the other factors described in this "Risk Factors" section. In addition, the stock market in general and the market for small pharmaceutical companies and biotechnology companies in particular haveexperienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of particularcompanies. Broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operatingperformance. In the past, following periods of volatility in the market, securities class-action litigation has often been instituted against companies. Suchlitigation, if instituted against us, could result in substantial costs and diversion of management's attention and resources, which could materially andadversely affect our business and financial condition.Because we do not anticipate paying any cash dividends on our capital stock in the foreseeable future, capital appreciation, if any, will be thesource of gain for our stockholders. We have never declared or paid cash dividends on our capital stock. We currently intend to retain all of our future earnings, if any, to finance thegrowth and development of our business. In addition, the terms of any future debt agreements may preclude us from paying dividends. As a result,capital appreciation, if any, of our common stock will be the sole source of gain for our stockholders for the foreseeable future.We are an "emerging growth company," and our election to delay adoption of new or revised accounting standards applicable to publiccompanies may result in our financial statements not being comparable to those of other public companies. As a result of this and other reduceddisclosure requirements applicable to emerging growth companies, our common stock may be less attractive to investors. We are an "emerging growth company," as defined in the Jumpstart Our Business Startups Act, or JOBS Act, and may remain an emerginggrowth company for up to five years, until December 31, 2017, although if the market value of our common stock that is held by non-affiliates exceeds$700 million as of any June 30 before that time or if we have annual gross revenues of $1 billion or more in any fiscal year, we would cease to be anemerging growth company as of December 31 of the applicable year. For so long as we remain an emerging growth company, we are permitted andintend to rely on exemptions from certain reporting requirements that are applicable to other public companies that are not emerging growth companies.These exemptions include not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, notbeing required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory auditfirm rotation or a supplement to the auditor's report providing additional information about the audit and the financial statements, reduced disclosureobligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding anonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. Among other provisions, the JOBS Act provides that an emerging growth company can take advantage of the extended transition period providedin Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. Thisallows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to privatecompanies. We are electing to delay such adoption of new or revised accounting standards, and as a result, we may not comply with new or revisedaccounting standards on the relevant dates on which adoption of such standards is required for public companies68Table of Contentsthat are not emerging growth companies. As a result of such election, our financial statements may not be comparable to the financial statements of otherpublic companies. We cannot predict whether investors will find our common stock less attractive because we will rely on these exemptions. If some investors findour common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.Item 1B. Unresolved Staff Comments None.Item 2. Properties We occupy approximately 7,484 square feet of office and laboratory space in Cambridge, Massachusetts under a lease that expires in October2014. We believe that our facility is sufficient to meet our current needs and that suitable additional space will be available as and when needed.Item 3. Legal Proceedings None.Item 4. Mine Safety Disclosures Not applicable.69Table of ContentsPART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuers Purchases of Equity Securities MARKET INFORMATION Our common stock is publicly traded on the NASDAQ Global Market under the symbol "VSTM." Trading of our common stock commenced onJanuary 27, 2012, following the completion of our initial public offering. The following table sets forth, for the periods indicated, the high and low salesprices for our common stock as reported on the NASDAQ Global Market.HOLDERS As of March 8, 2013, there were [51] holders of record of our common stock and the closing price of our common stock on the NASDAQ GlobalMarket as of that date was $9.30. The number of holders of record does not include beneficial owners whose shares are held by nominees in streetname.DIVIDENDS We have never declared or paid cash dividends on our common stock, and we do not expect to pay any cash dividends on our common stock in theforeseeable future.SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS The following table contains information about our equity compensation plans as of December 31, 2012. There are no equity compensation plansthat have not been approved by our security holders.70Year ended December 31, 2012 High Low First quarter (beginning January 27, 2012) $12.24 $10.05 Second quarter $11.58 $8.89 Third quarter $12.00 $7.56 Fourth quarter $9.67 $6.25 Plan category Number of securitiesto be issued uponexercise ofoutstanding stockoptions, warrants andrights Weighted-average exerciseprice ofoutstandingoptions,warrants andrights Number of securitiesremaining availablefor future issuanceunder equitycompensation plans Equity compensation plans approved by securityholders(1) 1,424,241 $6.90 1,534,973 (1)Includes information regarding our 2010 Equity Incentive Plan and 2012 Incentive Plan.Table of ContentsPERFORMANCE GRAPH The following performance graph and related information shall not be deemed to be "soliciting material" or to be "filed" with the SEC, nor shallsuch information be incorporated by reference into any future filing under the Securities Act, except to the extent that we specifically incorporate it byreference into such filing. The following graph compares the performance of our common stock to the NASDAQ Composite Index and to the NASDAQ BiotechnologyIndex from January 27, 2012 (the first date that shares of our common stock were publicly traded) through December 31, 2012. The comparisonassumes $100 was invested after the market closed on January 27, 2012 in our common stock and in each of the foregoing indices, and it assumesreinvestment of dividends, if any.COMPARISON OF 1 YEAR CUMULATIVE TOTAL RETURN*Among Verastem, Inc., the NASDAQ Composite Index, and the NASDAQ Biotechnology Index *$100 invested on 1/27/12 in stock or 12/31/11 in index, including reinvestment of dividends.Fiscal year ending December 31.Cumulative Total Return Comparison71 1/27/12 1/12 2/12 3/12 4/12 5/12 6/12 7/12 8/12 9/12 10/12 11/12 12/12 Verastem, Inc. 100.00 98.83 104.60 98.56 93.60 90.53 87.38 84.22 77.73 84.67 71.60 61.41 79.26 NASDAQComposite 100.00 105.41 110.14 114.22 113.19 106.11 111.06 111.58 115.48 116.86 112.11 112.38 112.30 NASDAQBiotechnology 100.00 108.15 110.22 112.16 113.85 110.05 115.34 119.43 122.58 127.72 121.09 127.20 126.50 Table of ContentsRECENT SALES OF UNREGISTERED SECURITIES Set forth below is information regarding certain shares of common stock, preferred stock, and stock options issued by us during the periodcovered by this Annual Report on Form 10-K that were not registered under the Securities Act. Also included is the consideration, if any, received byus for the securities and information relating to the section of the Securities Act, or rule of the SEC, under which exemption from registration wasclaimed.Issuances of securities In July 2012, we issued 192,012 shares of common stock to Pfizer, Inc. The securities were issued to Pfizer Inc in reliance upon the exemptionfrom the registration requirements of the Securities Act, as set forth in Section 4(2).PURCHASE OF EQUITY SECURITIES We did not purchase any of our registered equity securities during the period covered by this Annual Report on Form 10-K.USE OF PROCEEDS FROM REGISTERED SECURITIES In February 2012, we completed an initial public offering of 6,325,000 shares of our common stock at a price of $10.00 per share for an aggregateoffering price of $63.3 million. The offer and sale of all of the shares in the offering were registered under the Securities Act pursuant to a registrationstatement on Form S-1 (File No. 333-177677), which was declared effective by the SEC on January 26, 2012, and a registration statement on Form S-1(File No. 333-179910) filed pursuant to Rule 462(b) of the Securities Act. As of February 28, 2013, we have used approximately $26.4 million of the net proceeds primarily to fund the preclinical development of our leadproduct candidates to advance and expand the research and preclinical development of additional product candidates and companion diagnostics and forworking capital, capital expenditures and other general corporate purposes. We have invested the balance of the net proceeds from the offering in avariety of capital preservation investments, including investment grade, interest bearing instruments and U.S. government securities. There has been nomaterial change in our planned use of the balance of the net proceeds from the offering as described in our final prospectus filed with the SEC pursuantto Rule 424(b) under the Securities Act.72Table of ContentsItem 6. Selected Financial Data You should read the following selected financial data together with our consolidated financial statements and the related notes appearing elsewherein this Annual Report on Form 10-K and the "Management's discussion and analysis of financial condition and results of operations" section of thisAnnual Report on Form 10-K. The selected historical financial information in this section is not intended to replace our financial statements and therelated notes therein. Our historical results for any prior period are not necessarily indicative of results to be expected in any future period. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis of our financial condition and results of operations together with our financial statementsand related notes appearing elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or setforth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business and relatedfinancing, includes forward-looking statements that involve risks and uncertainties. You should read the "Risk factors" section of this Annual Report onForm 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by theforward-looking statements contained in the following discussion and analysis.73 Years EndedDecember 31, Period fromAugust 4, 2010(inception) toDecember 31, 2010 Period fromAugust 4, 2010(inception) toDecember 31, 2012 Statement of operations data: 2011 2012 (in thousands, except per share amounts) Operating expenses: Research and development $400 $9,883 $21,712 $31,995 General and administrative 384 3,815 10,518 14,717 Total operating expenses 784 13,698 32,230 46,712 Loss from operations (784) (13,698) (32,230) (46,712)Interest income — 15 246 261 Net loss $(784)$(13,683)$(31,984)$(46,451) Accretion of preferred stock (2) (32) (6) (40) Net loss applicable to commonstockholders $(786)$(13,715)$(31,990)$(46,491) Net loss per share applicable to commonstockholders—basic and diluted $(0.91)$(10.59)$(1.70)$(5.44) Weighted-average number of commonshares used in net loss per shareapplicable to common stockholders—basic and diluted 850 1,295 18,765 8,547 As of December 31, Balance sheet data: 2010 2011 2012 (in thousands) Cash, cash equivalents and investments $3,584 $56,805 $91,520 Working capital 3,228 44,795 54,683 Total assets 3,604 59,037 92,923 Redeemable convertible preferred stock 3,923 68,141 — Deficit accumulated during the development stage (784) (14,467) (46,451)Total stockholders' (deficit) equity (687) (12,766) 90,466 Table of ContentsOVERVIEW We are a clinical-stage biopharmaceutical company focused on discovering and developing proprietary small molecule drugs targeting cancer stemcells along with proprietary companion diagnostics. A cancer stem cell is a particularly aggressive type of tumor cell, resistant to conventional cancertherapy, that we believe is an underlying cause of tumor recurrence and metastasis. Our scientific co-founders have made discoveries that link theepithelial-to-mesenchymal transition, or EMT, to the emergence of cancer stem cells. This transition involves the transformation of one type of cancercell into a more aggressive and drug resistant type of cancer cell. Building on these discoveries, our scientific co-founders developed proprietarytechnology to create a stable population of cancer stem cells that we use to screen for and identify small molecule compounds that target cancer stemcells. We expect to initiate multiple clinical trials with our product candidates VS-6063, VS-4718 and VS-5584 in 2013, including a potentially pivotaltrial of VS-6063 in mesothelioma. We commenced active operations in the second half of 2010. Our operations to date have been limited to organizing and staffing our company,business planning, raising capital, acquiring and developing our technology, identifying potential product candidates, undertaking preclinical studies ofour most advanced product candidates and, recently, initiating a clinical trial for VS-6063. To date, we have not generated any revenues and havefinanced our operations with net proceeds from the private placement of our preferred stock and our initial public offering. As of December 31, 2012, we had a deficit accumulated during the development stage of $46.5 million. Our net loss was $32.0 million for the yearended December 31, 2012, $13.7 million for the year ended December 31, 2011, $784,000 for the period from August 4, 2010 (inception) toDecember 31, 2010 and $46.5 million for the period from August 4, 2010 (inception) to December 31, 2012. We expect to incur significant expensesand increasing operating losses for the foreseeable future. We expect our expenses to increase in connection with our ongoing activities, particularly aswe continue the research and development and initiate clinical trials of, and seek marketing approval for, our product candidates. In addition, if weobtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to product sales,marketing, manufacturing and distribution. Accordingly, we will need to obtain substantial additional funding in connection with our continuingoperations. Adequate additional financing may not be available to us on acceptable terms, or at all. If we are unable to raise capital when needed or onattractive terms, we would be forced to delay, reduce or eliminate our research and development programs or any future commercialization efforts. Wewill need to generate significant revenues to achieve profitability, and we may never do so.FINANCIAL OPERATIONS OVERVIEWRevenue To date, we have not generated any revenues. Our ability to generate product revenues, which we do not expect will occur for many years, if ever,will depend heavily on the successful development and eventual commercialization of our product candidates.Research and development expenses Research and development expenses consist of costs associated with our research activities, including our drug discovery efforts, and thedevelopment of our therapeutic product candidates and companion diagnostics. Our research and development expenses consist of:•employee-related expenses, including salaries, benefits, travel and stock-based compensation expense;74Table of Contents•external research and development expenses incurred under arrangements with third parties, such as contract research organizations, orCROs, manufacturing organizations and consultants, including our scientific advisory board; •license fees; and •facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities,depreciation of leasehold improvements and equipment, and laboratory and other supplies. We expense research and development costs to operations as incurred. We account for nonrefundable advance payments for goods and servicesthat will be used in future research and development activities as expenses when the service has been performed or when the goods have been received,rather than when the payment is made. We use our employee and infrastructure resources across multiple research and development projects. We do not allocate employee-relatedexpenses or depreciation to any particular project. Because all of our development projects are in preclinical development, we do not track research anddevelopment costs by project. The components of our research and development costs are described in more detail in "—Results of operations." We anticipate that our research and development expenses will increase significantly in future periods as we increase the scope and rate of our drugdiscovery efforts and begin costlier development activities, including clinical trials for our current and additional product candidates in the future. The successful development of our product candidates is highly uncertain. At this time, we cannot reasonably estimate or know the nature, timingand estimated costs of the efforts that will be necessary to complete development of our product candidates or the period, if any, in which material netcash inflows from our product candidates may commence. This is due to the numerous risks and uncertainties associated with developing drugs,including the uncertainty of:•the scope, rate of progress and expense of our drug discovery efforts and other research and development activities; •the potential benefits of our product candidates over other therapies; •our ability to market, commercialize and achieve market acceptance for any of our product candidates that we are developing or maydevelop in the future; •clinical trial results; •the terms and timing of regulatory approvals; and •the expense of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights. A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in thecosts and timing associated with the development of that product candidate. For example, if the FDA or other regulatory authority were to require us toconduct clinical trials beyond those which we currently anticipate will be required for the completion of clinical development of a product candidate or ifwe experience significant delays in enrollment in any clinical trials, we could be required to expend significant additional financial resources and time onthe completion of clinical development.75Table of ContentsGeneral and administrative expenses General and administrative expenses consist primarily of salaries and related costs for personnel, including stock-based compensation expense, inour executive, finance and business development functions. Other general and administrative expenses include allocated facility costs and professionalfees for legal, patent, investor and public relations, consulting, insurance premiums, and accounting services.Interest income Prior to September 30, 2011, our cash and cash equivalents were invested in non-interest-bearing accounts. As a result, we didn't earn interestincome until the last three months of 2011.Accretion of preferred stock Prior to the conversion of our preferred stock into 11,740,794 shares of common stock upon the closing of our initial public offering in February2012, our preferred stock was redeemable beginning in 2016 at its original issue price plus any declared but unpaid dividends upon a specified vote ofthe preferred stockholders. Accretion of preferred stock reflects the periodic accretion of issuance costs on our preferred stock to its redemption value.CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES Our management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which we haveprepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimatesand judgments that affect the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities in our financialstatements. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses and stock-based compensationdescribed in greater detail below. We base our estimates on our limited historical experience, known trends and events and various other factors that webelieve are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our significant accounting policies are described in more detail in the notes to our consolidated financial statements appearing elsewhere in thisAnnual Report on Form 10-K. However, we believe that the following accounting policies are the most critical to aid you in fully understanding andevaluating our financial condition and results of operations.Accrued research and development expenses As part of the process of preparing our financial statements, we are required to estimate our accrued expenses. This process involves reviewingquotations and contracts, identifying services that have been performed on our behalf and estimating the level of service performed and the associatedcost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoiceus monthly in arrears for services performed or when contractual milestones are met. We make estimates of our accrued expenses as of each balancesheet date in our financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimateswith the service providers and make adjustments if necessary. The significant estimates in our accrued research and development expenses include feespaid to CROs in connection with research and development activities for which we have not yet been invoiced.76Table of Contents We base our expenses related to CROs on our estimates of the services received and efforts expended pursuant to quotes and contracts with CROsthat conduct research and development on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contractand may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided andresult in a prepayment of the research and development expense. In accruing service fees, we estimate the time period over which services will beperformed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from ourestimate, we adjust the accrual or prepaid accordingly. Although we do not expect our estimates to be materially different from amounts actuallyincurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary andcould result in us reporting amounts that are too high or too low in any particular period.Stock-based compensation Prior to becoming a public company, we utilized significant estimates and assumptions in determining the fair value of our common stock. Wegranted stock options at exercise prices not less than the fair market value of our common stock as determined by the board of directors, with input frommanagement. The board of directors determined the estimated fair value of our common stock based on a number of objective and subjective factors,including external market conditions affecting the biotechnology industry sector and the prices at which we sold shares of redeemable convertiblepreferred stock, the superior rights and preferences of securities senior to our common stock at the time and the likelihood of achieving a liquidity event,such as an initial public offering or sale of our company. We utilized various valuation methodologies in accordance with the framework of the 2004 American Institute of Certified Public AccountantsTechnical Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation , to estimate the fair value of our commonstock. The methodologies included an asset-based approach and the current value method for our initial common stock valuation as of November 30,2010, the option pricing method utilizing the reverse backsolve method to estimate our underlying equity value as of July 31, 2011 and a methodologythat determined an estimated value under an initial public offering scenario and a sale scenario based upon an assessment of the probability ofoccurrence of each scenario as of September 30, 2011, November 17, 2011, and December 31, 2011. Each valuation methodology included estimatesand assumptions that required our judgment. These estimates included assumptions regarding future performance, including the successful completionof preclinical studies and clinical trials and the time to completing an initial public offering or sale. Significant changes to the key assumptions used inthe valuations could have resulted in different fair values of common stock at each valuation date. We recognize stock-based compensation expense for stock options issued to employees based on the grant date fair value of the awards on astraight-line basis over the requisite service period. We record stock-based compensation expense for stock options issued to non-employees based onthe estimated fair value of the services received or of the equity instruments issued, whichever is more reliability measured, based on the vesting datefair value of the awards on a straight-line basis over the vesting period. We estimate the fair value of the share- based awards, including stock options, using the Black-Scholes option-pricing model. Determining the fairvalue of share-based awards requires the use of subjective assumptions, including the expected term of the award and expected stock price volatility.The assumptions used in determining the fair value of share-based awards represent management's best estimates, which involve inherent uncertaintiesand the application of management judgment. As a result, if factors change, and we use different assumptions, our share-based compensation could bematerially different in the future. The risk-free interest rate used for each grant is based on a U.S.77Table of ContentsTreasury instrument whose term is consistent with the expected term of the stock option. Because we do not have a sufficient history to estimate theexpected term, we use the simplified method as described in SAB Topic 14.D.2 for estimating the expected term. The simplified method is based on theaverage of the vesting tranches and the contractual life of each grant. Because there was no public market for our common stock prior to our initialpublic offering, we lacked company-specific historical and implied volatility information. Therefore, we used the historical volatility of a representativegroup of public biotechnology and life sciences companies with similar characteristics to us. In 2012, subsequent to our initial public offering, we beganto use a blended volatility rate using our own historical volatility and that of a representative group of public biotechnology and life sciences companieswith similar characteristics to us. We have not paid and do not anticipate paying cash dividends on our shares of common stock; therefore, the expecteddividend yield is assumed to be zero. We also recognize compensation expense for only the portion of options that are expected to vest. Accordingly,we have estimated expected forfeitures of stock options based on our historical forfeiture rate, adjusted for known trends, and used these rates indeveloping a future forfeiture rate. We have also granted performance-based stock options with terms that allow the recipients to vest in a specific number of shares based upon theachievement of performance-based milestones as specified in the grants. Share-based compensation expense associated with these performance-basedstock options is recognized if the performance condition is considered probable of achievement using management's best estimates of the time to vestingfor the achievement of the performance-based milestones. If the actual achievement of the performance-based milestones varies from our estimates,share-based compensation expense could be materially different than what is recorded in the period. The cumulative effect on current and prior periodsof a change in the estimated time to vesting for performance-based stock options will be recognized as compensation cost in the period of the revision,and recorded as a change in estimate. While the assumptions used to calculate and account for share-based compensation awards represents management's best estimates, these estimatesinvolve inherent uncertainties and the application of management's judgment. As a result, if revisions are made to our underlying assumptions andestimates, our share-based compensation expense could vary significantly from period to period. As of December 31, 2012, there was approximately $5.4 million, $6.7 million and $4.2 million of unrecognized share-based compensation, net ofestimated forfeitures, related to stock options, restricted stock units and shares of restricted stock awards, respectively, which are expected to berecognized over weighted average periods of 3.0 years, 3.1 and 1.75 years, respectively. The total unrecognized share-based compensation cost will beadjusted for future changes in estimated forfeitures. See Notes 2 and 8 to our consolidated financial statements located in this Annual Report onForm 10-K for further discussion of share-based compensation.RESULTS OF OPERATIONS The information reported within our consolidated financial statements from August 4, 2010 to December 31, 2011 was based solely on theaccounts of Verastem, Inc. In December 2012, Verastem Securities Company, our wholly owned subsidiary, was incorporated. All financialinformation presented after December 31, 2011 has been consolidated and includes the accounts of our wholly owned subsidiary. All significantintercompany balances and transactions have been eliminated in consolidation.Comparison of the Year Ended December 31, 2012 to the Year Ended December 31, 2011 Research and development expense. Research and development expense for the year ended December 31, 2012 was $21.7 million compared to$9.9 million for the year ended December 31, 2011. The $11.8 million increase is primarily related to increased contract research organization expenseof78Table of Contents$4.1 million, an increase of $3.6 million in license fees due to our agreement with Pfizer, Inc., including expense associated with the issuance of192,012 shares of common stock, an increase of $3.3 million for personnel costs, including stock-based compensation of $2.0 million, primarily due toa higher fair value of our common stock, an increase of $404,000 for laboratory supplies, an increase of $118,00 for depreciation due to additionallaboratory equipment and $86,000 in additional occupancy costs due to a full year of costs associated with our new facility that we occupied in May2011. General and administrative expense. General and administrative expense for the year ended December 31, 2012 was $10.5 million compared to$3.8 million for the year ended December 31, 2011. The $6.7 million increase resulted from an increase of $4.6 million for personnel costs, includingstock-based compensation of $3.8 million, primarily due to higher fair value of our common stock, an increase of $1.1 million in professional feesprimarily related to additional legal and accounting fees for being a publicly traded company, an increase of $389,000 in insurance costs primarilyrelated to being a publicly traded company, an increase of $272,000 in consulting fees and an increase of travel and entertainment costs of $95,000. Interest income. Interest income increased to $246,000 for the year ended December 31, 2012 from $15,000 for the year ended December 31,2011. The increase in interest income was caused by an increase in the average cash balances available for investment and an increase in interest ratesearned on investments. The increase in the average cash balances for investment was primarily due to the net proceeds from the sale of Series Credeemable convertible preferred stock in November 2011 and net proceeds from our initial public offering in February 2012. For most of the yearended December 31, 2011, our cash was deposited in non-interest bearing accounts. Accretion of preferred stock. During 2012, we recorded $6,000 of accretion reflecting the periodic accretion of issuance costs associated with ourseries A, series B and series C preferred stock through the date of our initial public offering when all outstanding shares of preferred stock convertedinto common stock compared to $32,000 for the year ended December 31, 2011.Discussion of the Year Ended December 31, 2011 We were incorporated on August 4, 2010. As a result, our results of operations reflect the year ended December 31, 2011 and the period fromAugust 4, 2010 (inception) to December 31, 2010. There is no comparable period for 2010. Research and development expenses. Research and development expenses were $9.9 million for the year ended December 31, 2011. Expensesduring the year included:•Contract research organization expenses of $3.7 million, representing 37% of total research and development expenses during the year,comprised of expenses for outsourced biology, chemistry and development services. •Payroll expense of $1.5 million, representing 15% of total research and development expenses during the year, including salaries, payrolltaxes and benefits for our employees in research and development. We had 11 employees in research and development at December 31,2011. Payroll expense also included stock-based compensation expense for employees of $30,000. •Consulting fees of $1.3 million, representing 13% of total research and development expenses during the year, including $476,000 forour scientific advisory board, $232,000 for recruitment consultants and $143,000 for database consultants. •Laboratory supply expense of $1.0 million, representing 11% of total research and development expenses during the year.79Table of Contents•Non-employee stock-based compensation expense of $1.0 million, representing 10% of total research and development expenses duringthe year, related to stock options and restricted stock awarded to members of our scientific advisory board. •License fee expense of $842,000, representing 9% of total research and development expense during the year, comprised of upfront andannual license fees, including $406,000 for the obligation to issue a warrant for the purchase of 142,857 shares of our common stock toPoniard Pharmaceuticals, Inc. •Occupancy expense of $465,000, representing 5% of total research and development expenses during the year, which is an allocatedportion of rent and other occupancy costs. General and administrative expenses. General and administrative expenses were $3.8 million for the year ended December 31, 2011. Expensesduring the year included:•Payroll expense of $1.4 million, representing 38% of total general and administrative expenses during the year, including salaries,payroll taxes and benefits for our general and administrative employees. Payroll expense included stock-based compensation expense foremployees of $62,000. •Consulting fees of $696,000, representing 18% of total general and administrative expenses during the year, including businessdevelopment, public relations and finance consultants. •Professional fee expense of $666,000, representing 18% of total general and administrative expenses during the year, comprised of feesfor audit, tax and legal services, including the reimbursement to the Whitehead Institute of patent costs related to our licenses with theWhitehead Institute. •Non-employee stock-based compensation expense of $592,000, representing 16% of total general and administrative expenses duringthe year, related to restricted stock awarded to our co-founders. •Occupancy expense of $207,000, representing 5% of total general and administrative expenses during the year, which is an allocatedportion of rent and other occupancy costs. •Travel expense of $190,000, representing 5% of total general and administrative expenses during the year, including travel, meals,entertainment and conferences. Interest income. We recorded $15,000 of interest income in the year ended December 31, 2011 associated with our cash equivalents andinvestments. Accretion of preferred stock. We recorded $32,000 of accretion in the year ended December 31, 2011 reflecting the periodic accretion of issuancecosts associated with our series A, series B and series C preferred stock.LIQUIDITY AND CAPITAL RESOURCESSources of liquidity To date, we have not generated any revenues. We have financed our operations to date through private placements of our preferred stock and ourinitial public offering, which we completed in February 2012. As of December 31, 2012, we had received $68.1 million in net proceeds from theissuance of preferred stock and $56.8 million in net proceeds from our initial public offering in February 2012. As of December 31, 2012, we had$91.5 million in cash, cash equivalents, short-term investments and long-term investments. We primarily invest our cash, cash equivalents andinvestments in a U.S. Treasury money market fund, U.S. agency notes and corporate bonds.80Table of ContentsCash flows The following table sets forth the primary sources and uses of cash for each of the periods set forth below. Operating activities. The use of cash in all periods resulted primarily from our net losses adjusted for non-cash charges and favorable changes inthe components of working capital. The increase in cash used in operating activities for the year ended December 31, 2012 compared to the year endedDecember 31, 2011 is due to an increase in research and development expenses as we increased our research and development headcount and increasedspending on external research and development costs. The significant increase in cash used in operating activities for the year ended December 31, 2011compared to the period from August 4, 2010 (inception) to December 31, 2010 is due to an increase in research and development expenses as weincreased our research and development headcount, increased spending on external research and development costs and from increases in the balance ofaccounts payable, accrued expenses and deferred rent. In addition, we commenced operations in August 2010 and, as such, the period endedDecember 31, 2010 reflects only five months of activity. We expect cash used in operating activities to continue to increase for the foreseeable future aswe fund our increased research and development activities. Investing activities. The cash used in investing activities for the year ended December 31, 2012 reflects the net purchases of investments of$45.5 million and the purchase of $310,000 of property and equipment. The cash used in investing activities for the year ended December 31, 2011included $35.9 million purchase of investments, $785,000 purchase of property and equipment and an $86,000 increase in restricted cash related to astandby letter of credit issued as a security deposit for our facility lease. The cash used in investing activities for the year ended December 31, 2010included $8,000 purchase of property and equipment. Financing activities. The cash provided by financing activities for the year ended December 31, 2012 reflects the $56.8 million of net proceedsfrom our initial public offering. The cash provided by financing activities in the year ended December 31, 2011 is the result of the sale and issuance of12,000,000 shares of our series A preferred stock for net proceeds of $12.0 million, the sale and issuance of 16,025,000 shares of our series Bpreferred stock for net proceeds of $31.9 million, the sale and issuance of 9,067,825 shares of our series C preferred stock for net proceeds of$20.2 million and $38,000 of net proceeds from the sale of restricted stock to employees. The cash provided by financing activities in the period fromAugust 4, 2010 (inception) to December 31, 2010 is primarily the result of the sale and issuance of 4,000,000 shares of our series A preferred stock fornet proceeds of $3.9 million.81 Years Ended December 31, Period fromAugust 4, 2010(inception) toDecember 31, 2010 2011 2012 Net cash provided by (used in) Net cash used in operating activities $(330)$(9,372)$(22,601)Net cash used in investing activities (8) (36,722) (45,859)Net cash provided by financing activities 3,922 63,464 57,602 Net increase (decrease) in cash and cash equivalents $3,584 $17,370 $(10,858) Table of ContentsFunding requirements We recently initiated a Phase 1/1b clinical trial for VS-6063 in ovarian cancer. All of our other product candidates are still in preclinicaldevelopment. We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. We anticipate that ourexpenses will increase substantially if and as we:•continue our research and preclinical and clinical development of our product candidates; •seek to identify additional product candidates that target cancer stem cells; •acquire or in-license other products and technologies; •initiate additional clinical trials for our product candidates; •seek marketing approvals for our product candidates that successfully complete clinical trials; •ultimately establish a sales, marketing and distribution infrastructure to commercialize any products for which we may obtain marketingapproval; •maintain, expand and protect our intellectual property portfolio; •hire additional clinical, quality control and scientific personnel; and •add operational, financial and management information systems and personnel, including personnel to support our product developmentand planned future commercialization efforts. We expect that our existing cash, cash equivalents and investments will enable us to fund our current operating plan and capital expenditurerequirements into late 2015. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resourcessooner than we currently expect. Because of the numerous risks and uncertainties associated with the development and commercialization of our productcandidates, and the extent to which we may enter into collaborations with third parties for development and commercialization of our product candidates,we are unable to estimate the amounts of increased capital outlays and operating expenses associated with completing the development of our currentproduct candidates. Our future capital requirements will depend on many factors, including:•the scope, progress, results and costs of compound discovery, preclinical development, laboratory testing and clinical trials for ourproduct candidates; •the extent to which we acquire or in-license other products and technologies; •the costs, timing and outcome of regulatory review of our product candidates; •the costs of future commercialization activities, including product sales, marketing, manufacturing and distribution, for any of ourproduct candidates for which we receive marketing approval; •revenue, if any, received from commercial sales of our product candidates, should any of our product candidates receive marketingapproval; •the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defendingintellectual property-related claims; and •our ability to establish collaborations on favorable terms, if at all. Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equityofferings, debt financings, collaborations, strategic alliances and licensing arrangements. We do not have any committed external source of funds. To theextent that we raise additional capital through the sale of equity or convertible debt securities, the ownership82Table of Contentsinterest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affectthe rights of our existing stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability totake specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds throughcollaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, futurerevenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additionalfunds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or futurecommercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.CONTRACTUAL OBLIGATIONS AND COMMITMENTS The following table summarizes our contractual obligations at December 31, 2012. In July 2012, we entered into a License Agreement with Pfizer Inc., ("Pfizer"), under which Pfizer granted us worldwide, exclusive rights toresearch, develop, manufacture and commercialize products containing certain of Pfizer's inhibitors of focal adhesion kinase (the "Products") for alltherapeutic, diagnostic and prophylactic uses in humans. We have the right to grant sublicenses under the foregoing licensed rights, subject to certainrestrictions. We are solely responsible, at our own expense, for the clinical development of the Products, which is to be conducted in accordance with anagreed-upon development plan. We are also responsible for all manufacturing and commercialization activities at our own expense. Pfizer is required toprovide us with an initial quantity of clinical supply of one of the Products for an agreed upon price. We made a one-time cash payment to Pfizer in theamount of $1.5 million and issued to Pfizer 192,012 shares of our common stock. Pfizer is also eligible to receive up to $2 million in developmentalmilestones and up to an additional $125 million based on the successful attainment of regulatory and commercial sales milestones. Pfizer is also eligibleto receive high single to mid double digit royalties on future net sales of Products. Our royalty obligations with respect to each Product in each countrybegin on the date of first commercial sale of the Product in that country, and end on the later of 10 years after the date of first commercial sale of theProduct in that country or the date of expiration or abandonment of the last claim contained in any issued patent or patent application licensed by Pfizerto us that covers the Product in that country. Under our drug discovery platform license agreement, which we amended and restated in January 2012, we also have agreed to make milestonepayments to the Whitehead Institute upon achieving various development, regulatory and commercialization milestones. For each licensed product, weagreed to make milestone payments of up to an aggregate of $1,560,000 plus an additional amount for83(in thousands) Total Less than1 year 1 - 3 years 3 - 5 years More than5 years Operating lease obligations $667 $360 $307 — — License agreements(1) — — — — — (1)As discussed in Note 11 to the financial statements appearing elsewhere in this Annual Report on Form 10-K, we haveexecuted several agreements to license intellectual property. The license agreements require us to pay upfront license feesand ongoing annual license maintenance fees, totaling a minimum of $150,000 per year beginning in 2013 up to amaximum amount of $480,000 per year beginning in 2017, as well as reimburse certain patent costs incurred by thelicensors, as applicable. We have not included maintenance fees in the table above since the minimum annual paymentsare perpetual and the agreements are cancelable by us at any time upon prior written notice to the licensor.Table of Contentseach subsequent approval of additional indications for a maximum number of licensed products. For each identified product that is not a licensedproduct, we agreed to make milestone payments of up to an aggregate of $815,000 plus an additional amount for each subsequent approval of additionalindications for a maximum number of identified products. Each type of specified milestone payment is payable only for each of the maximum number oflicensed products and the maximum number of identified products, as the case may be, to achieve the applicable milestone. In addition, a separatemilestone payment is due upon the first commercial sale of each licensed product or identified product that is a diagnostic or prognostic test. A singleadditional milestone payment is due for the first issuance of licensed patent rights in the United States, the United Kingdom, France, Germany, Spain orItaly. In addition, we have agreed to pay the Whitehead Institute royalties as a percentage of net sales of licensed products. The royalty rate is in the lowsingle digits as a percentage of net sales for licensed products that are therapeutics, the mid single digits for licensed products that are diagnostics orprognostics and less than one percent for identified products. Under our license agreement with Poniard Pharmaceuticals, Inc., or Poniard, that we entered into in November 2011 relating to VS-4718 and VS-5095 and other compounds covered by a licensed patent right under that agreement that have the inhibition of Focal Adhesion Kinase as a primary modeof action, we paid an upfront license fee and agreed to pay Poniard milestone payments of up to an aggregate of $13,250,000 upon the achievement ofspecified development and regulatory milestones. We also agreed to issue to Poniard a warrant to purchase 142,857 shares of our common stock uponthe first dosing of the first patient in our first Phase 1 clinical trial of a licensed product. The exercise price of such warrant would be equal to theaverage closing price of our common stock during the five trading days preceding such issue date. In addition, we agreed to pay low to mid-single digitroyalties to Poniard as a percentage of net sales of licensed products. Under our separate exclusive license agreement with the Whitehead Institute, or the cancer diagnostic license agreement, which we amended andrestated in December 2011, we paid an upfront license fee and agreed to make milestone payments of up to an aggregate of $825,000 to the WhiteheadInstitute upon achieving specified regulatory and commercialization milestones. In addition, we have agreed to pay the Whitehead Institute royalties as apercentage of net sales of licensed products. The royalty rate is in the mid-single digits as a percentage of net sales.OFF-BALANCE SHEET ARRANGEMENTS We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under Securities andExchange Commission rules.TAX LOSS CARRYFORWARDS As of December 31, 2012, we had federal and state net operating loss carryforwards of $31.9 million, which are available to reduce future taxableincome. We also had federal tax credits of $358,000 and state tax credits of $229,000, which may be used to offset future tax liabilities. The netoperating loss and tax credit carryforwards will expire at various dates through 2032. Net operating loss and tax credit carryforwards are subject toreview and possible adjustment by the Internal Revenue Service and state tax authorities and may become subject to an annual limitation in the event ofcertain cumulative changes in the ownership interest of significant stockholders over a three-year period in excess of 50%, as defined underSections 382 and 383 of the Internal Revenue Code, as well as similar state provisions. This could limit the amount of tax attributes that can be utilizedannually to offset future taxable income or tax liabilities. The amount of the annual limitation is determined based on the value of our companyimmediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. At December 31, 2012, werecorded a 100% valuation allowance against our net operating loss and tax credit carryforwards of approximately $15.5 million, as we believe it ismore likely than not that the tax benefits will not be fully realized. In the future, if we84Table of Contentsdetermine that a portion or all of the tax benefits associated with our tax carryforwards will be realized, net income would increase in the period ofdetermination.RECENTLY ADOPTED ACCOUNTING STANDARDS We have not recently adopted any new accounting standards.Item 7A. Quantitative and Qualitative Disclosures About Market Risk We are exposed to market risk related to changes in interest rates. We had cash, cash equivalents and investments of $56.8 million as ofDecember 31, 2011. We had cash, cash equivalents and investments of $91.5 million as of December 31, 2012, consisting of cash, money marketfunds, and United States Treasuries and federal agency bonds. Our primary exposure to market risk is interest rate sensitivity, which is affected bychanges in the general level of U.S. interest rates, particularly because most of our investments are in short-term securities. Our available for salesecurities are subject to interest rate risk and will fall in value if market interest rates increase. Due to the short-term duration most of our investmentportfolio and the low risk profile of our investments, an immediate 100 basis point change in interest rates would not have a material effect on the fairmarket value of our portfolio. We contract with CROs and contract manufacturers globally. We may be subject to fluctuations in foreign currency rates in connection with theseagreements. Transactions denominated in currencies other than the functional currency are recorded based on exchange rates at the time suchtransactions arise. As of December 31, 2012 and 2011, approximately $42,000 and $7,000 of our total liabilities was denominated in currencies otherthan the functional currency, respectively.Item 8. Financial Statements and Supplementary Data Our consolidated financial statements, together with the report of our independent registered public accounting firm, appear on pages F-1 throughF-28 of this Annual Report on Form 10-K.Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures Our Chief Executive Officer and our Chief Operating Officer evaluated the effectiveness of our disclosure controls and procedures, as defined inRules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of the end of the period covered bythis report. Based on that evaluation, our Chief Executive Officer and our Chief Operating Officer concluded that our disclosure controls andprocedures as of the end of the period covered by this report were effective.Management's Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Internal control overfinancial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act as the process designed by, or under the supervision of, ourChief Executive Officer and our Chief Operating Officer, and effected by our board of directors, management and other personnel, to providereasonable assurance regarding the reliability of our85Table of Contentsfinancial reporting and the preparation of our financial statements for external purposes in accordance with generally accepted accounting principles, andincludes those policies and procedures that:(1)pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets; (2)provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance withgenerally accepted accounting principles, and that receipts and expenditures are being made only in accordance with the authorizations ofmanagement and directors; and (3)provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use or disposition of assets thatcould have a material effect on our financial statements. Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Operating Officer, weconducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework provided in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, ourmanagement concluded that our internal control over financial reporting was effective as of December 31, 2012.Changes in Internal Control Over Financial Reporting No change in our internal control over financial reporting occurred during the fiscal quarter ended December 31, 2012 that has materially affected,or is reasonably likely to materially affect, the Company's internal control over financial reporting.Item 9B. Other Information None86Table of ContentsPART III Item 10. Directors, Executive Officers, and Corporate Governance Other than the information regarding our executive officers provided in Part I of this report under the heading "Business—Executive Officers ofthe Registrant," the information required to be furnished pursuant to this item is incorporated herein by reference to our definitive proxy statement forthe 2013 Annual Meeting of the Stockholders.Item 11. Executive Compensation The information required by this Item 11 is incorporated herein by reference from our definitive proxy statement for the 2013 Annual Meeting ofStockholders.Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this Item 12 is incorporated herein by reference from our definitive proxy statement for the 2013 Annual Meeting ofStockholders.Item 13. Certain Relationships and Related Transactions, and Director Independence The information required by this Item 13 is incorporated herein by reference from our definitive proxy statement for the 2013 Annual Meeting ofStockholders.Item 14. Principal Accountant Fees and Services The information required by this Item 14 is incorporated herein by reference from our definitive proxy statement for the 2013 Annual Meeting ofStockholders.87Table of ContentsPART IV Item 15. Exhibits and Financial Statement Schedules Financial Statements See Part II, Item 8 for the Financial Statements required to be included in this Annual Report on Form 10-K.Financial Statement Schedules All financial statement schedules are omitted because they are not applicable or the required information is included in the financial statements ornotes thereto.Exhibits Those exhibits required to be filed by Item 601 of Regulation S-K are listed in the Exhibit Index immediately preceding the exhibits hereto andsuch listing is incorporated herein by reference.88Table of ContentsSIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized on this 26th day of March 2013. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of theregistrant in the capacities and on the dates indicated.89 VERASTEM, INC. By: /s/ CHRISTOPH WESTPHAL, M.D., PH.D.Christoph Westphal, M.D., Ph.D.Chief Executive OfficerSignature Title Date /s/ CHRISTOPH WESTPHAL, M.D., PH.DChristoph Westphal, M.D., Ph.D. Chief Executive Officer and Director (Principalexecutive officer) March 26, 2013/s/ ROBERT FORRESTERRobert Forrester President and Chief Operating Officer (Principalfinancial officer and Principal accounting officer) March 26, 2013/s/ RICHARD ALDRICHRichard Aldrich Director March 26, 2013/s/ JOHN K. CLARKEJohn K. Clarke Director March 26, 2013/s/ ALISON LAWTONAlison Lawton Director March 26, 2013/s/ MICHAEL KAUFFMAN, M.D., PH.D.Michael Kauffman, M.D., Ph.D. Director March 26, 2013/s/ S. LOUISE PHANSTIELS. Louise Phanstiel Director March 26, 2013/s/ STEPHEN SHERWIN, M.D.Stephen Sherwin, M.D. Director March 26, 2013/s/ HENRI TERMEERHenri Termeer Director March 26, 2013Table of ContentsVerastem, Inc.(A development stage company) CONSOLIDATED FINANCIAL STATEMENTS Period from August 4, 2010 (inception) to December 31, 2010 and the years ended December 31, 2011 and 2012, and the period fromAugust 4, 2010 (inception) to December 31, 2012 CONTENTS F-1Report of Independent Registered Public Accounting Firm F-2Consolidated Financial Statements Consolidated Balance Sheets F-3Consolidated Statements of Operations and Comprehensive Loss F-4Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders' (Deficit) Equity F-5Consolidated Statements of Cash Flows F-6Notes to Consolidated Financial Statements F-7Table of ContentsVerastem, Inc.(A development stage company) REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders ofVerastem, Inc. We have audited the accompanying consolidated balance sheets of Verastem, Inc. (a development stage company) (the Company) as ofDecember 31, 2011 and 2012, and the related consolidated statements of operations and comprehensive loss, redeemable convertible preferred stock andstockholders' (deficit) equity and cash flows for the period from August 4, 2010 (inception) to December 31, 2010, the years ended December 31, 2011and 2012, and for the period from August 4, 2010 (inception) to December 31, 2012. These financial statements are the responsibility of the Company'smanagement. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. Wewere not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal controlover financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit alsoincludes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide areasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Verastem, Inc.as of December 31, 2011 and 2012 and the consolidated results of its operations and its cash flows for the period from August 4, 2010 (inception) toDecember 31, 2010, the years ended December 31, 2011 and 2012, and the period from August 4, 2010 (inception) to December 31, 2012, inconformity with U.S. generally accounting principles./s/ Ernst & Young LLPBoston, MassachusettsMarch 26, 2013F-2Table of ContentsVerastem, Inc.(A development stage company) CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) See accompanying notes.F-3 December 31, 2011 2012 Assets Current assets: Cash and cash equivalents $20,954 $10,096 Short-term investments 26,857 46,480 Prepaid expenses and other current assets 130 506 Total current assets 47,941 57,082 Property and equipment, net 709 811 Long-term investments 8,994 34,944 Other assets 1,307 — Restricted cash 86 86 Total assets $59,037 $92,923 Liabilities, redeemable convertible preferred stock and stockholders' (deficit) equity Current liabilities: Accounts payable $2,273 $1,848 Accrued expenses 873 551 Total current liabilities 3,146 2,399 Deferred rent 74 38 Liability for shares subject to repurchase 36 20 Obligation to issue warrant 406 — Commitments and contingencies (Note 10) Redeemable convertible preferred stock 68,141 — Stockholders' (deficit) equity: Convertible preferred stock, $0.0001 par value; no and 5,000 shares authorized atDecember 31, 2011 and 2012, respectively, no shares issued and outstanding — — Common stock, $0.0001 par value; 53,093 and 100,000 shares authorized at December 31,2011 and 2012, respectively, 1,559 and 20,364 shares issued and outstanding atDecember 31, 2011 and 2012, respectively 1 2 Additional paid-in capital 1,702 136,893 Accumulated other comprehensive (loss) income (2) 22 Deficit accumulated during the development stage (14,467) (46,451) Total stockholders' (deficit) equity (12,766) 90,466 Total liabilities, redeemable convertible preferred stock and stockholders' (deficit) equity $59,037 $92,923 Table of ContentsVerastem, Inc.(A development stage company) CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (in thousands, except per share amounts) See accompanying notes.F-4 Period fromAugust 4, 2010(inception) toDecember 31,2010 Years EndedDecember 31, Period fromAugust 4, 2010(inception) toDecember 31,2012 2011 2012 Operating expenses: Research and development $400 $9,883 $21,712 $31,995 General and administrative 384 3,815 10,518 14,717 Total operating expenses 784 13,698 32,230 46,712 Loss from operations (784) (13,698) (32,230) (46,712)Interest income — 15 246 261 Net loss (784) (13,683) (31,984) (46,451)Accretion of preferred stock (2) (32) (6) (40) Net loss applicable to common stockholders $(786)$(13,715)$(31,990)$(46,491) Net loss per share applicable to common stockholders $(0.91)$(10.59)$(1.70)$(5.44) Weighted-average number of common shares used in net lossper share applicable to common stockholders—basic anddiluted 850 1,295 18,765 8,547 Net loss $(784)$(13,683)$(31,984)$(46,451)Unrealized (losses) gains on available-for-sale securities — (2) 24 22 Comprehensive loss $(784)$(13,685)$(31,960)$(46,429) Table of ContentsVerastem, Inc.(A development stage company) CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' (DEFICIT)EQUITY (in thousands, except share data) Redeemableconvertiblepreferred stock Deficitaccumulatedduring thedevelopmentstage Common stock Accumulatedothercomprehensiveloss Additionalpaid-incapital Totalsstockholder'sdeficit Shares Amount Shares Amount Balance atAugust 4, 2010(inception) — $— — $— $— $— $— $— Sale of commonstock tofounders — — 714,286 1 — — — 1 Vesting ofrestrictedstock — — 133,926 — — — — — Issuance ofcommonstock inexchange forlicense — — 166,664 — 46 — — 46 Issuance ofSeries Aredeemableconvertiblepreferredstock, net ofoffering costsof $79 4,000,000 3,921 — — — — — — Accretion ofredeemableconvertiblepreferredstock toredemptionvalue — 2 — — (2) — — (2)Stock-basedcompensationexpense — — — — 52 — — 52 Net loss — — — — — — (784) (784) Balance atDecember 31,2010 4,000,000 $3,923 1,014,876 $1 $96 $— $(784)$(687)Net loss — — — — — — (13,683) (13,683)Unrealized lossoninvestments — — — — — (2) (2)Issuance ofSeries Aredeemableconvertiblepreferredstock 12,000,000 12,000 — — — — — — Issuance ofSeries Bredeemableconvertiblepreferredstock, net ofoffering costsof $113 16,025,000 31,937 — — — — — — Issuance ofSeries Credeemable See accompanying notes.F-5convertiblepreferredstock, net ofoffering costsof $153 9,067,825 20,249 — — — — — — Accretion ofredeemableconvertiblepreferredstock toredemptionvalue — 32 — — (32) — — (32)Vesting ofrestrictedstock — — 543,712 — 3 — — 3 Stock-basedcompensationexpense — — — — 1,635 — — 1,635 Balance atDecember 31,2011 41,092,825 $68,141 1,558,588 $1 $1,702 $(2)$(14,467)$(12,766)Net loss — — — — — — (31,984) (31,984)Unrealized gainoninvestments — — — — — 24 — 24 Accretion ofredeemableconvertiblepreferredstock toredemptionvalue — 6 — — (6) — — (6)Conversion ofredeemableconvertiblepreferredstock intocommonstock (41,092,825) (68,147) 11,740,794 1 68,146 — — 68,147 Issuance ofcommonstock, net ofissuancecosts of$1,984 — — 6,325,000 — 56,838 — — 56,838 Issuance ofcommonstock inexchange forlicense — — 192,012 — 1,957 — — 1,957 Vesting ofrestrictedstock — — 542,421 — 16 — — 16 Issuance ofcommonstockresultingfrom exerciseof stockoptions — — 5,395 — 3 — — 3 Obligation toissue awarrant — — — — 837 — — 837 Stock-basedcompensationexpense — — — — 7,400 — — 7,400 Balance atDecember 31,2012 — $— 20,364,210 $2 $136,893 $22 $(46,451)$90,466 Table of ContentsVerastem, Inc.(A development stage company) CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Period fromAugust 4, 2010(inception) toDecember 31,2010 Years EndedDecember 31, Period fromAugust 4, 2010(inception) toDecember 31,2012 2011 2012 Net loss $(784)$(13,683)$(31,984)$(46,451)Adjustments to reconcile net loss to net cash used inoperating activities: Depreciation and amortization — 83 207 290 Stock-based compensation expense 52 1,635 7,400 9,087 Common stock issued in exchange for license 46 — 1,957 2,003 Obligation to issue a warrant in exchange for license — 439 — 439 Change in fair value of obligation to issue a warrant — (33) 431 398 Changing in operating assets and liabilities: Prepaid expenses and other current assets (12) (118) (376) (506)Accounts payable 279 1,994 (425) 1,848 Accrued expenses and deferred rent 89 311 189 589 Net cash used in operating activities (330) (9,372) (22,601) (32,303)Investing activities Purchases of property and equipment (8) (785) (310) (1,103)Purchases of investments — (35,851) (154,028) (189,879)Maturities of investments — — 108,479 108,479 Increase in restricted cash — (86) — (86) Net cash used in investing activities (8) (36,722) (45,859) (82,589)Financing activities Proceeds from the issuance of redeemable convertiblepreferred stock 3,921 64,186 — 68,107 Proceeds from the exercise of stock options — — 3 3 Net proceeds (costs) from the issuance of common stock andrestricted common stock 1 (722) 57,599 56,878 Net cash provided by financing activities 3,922 63,464 57,602 124,988 Increase (decrease) in cash and cash equivalents 3,584 17,370 (10,858) 10,096 Cash and cash equivalents at beginning of period — 3,584 20,954 — Cash and cash equivalents at end of period $3,584 $20,954 $10,096 $10,096 Supplemental disclosure of non-cash financial activity Accretion of redeemable convertible preferred stock toredemption value $2 $32 $6 $40 Conversion of redeemable convertible preferred stock uponinitial public offering $— $— $68,148 $68,148 Reclassification of obligation to issue warrant from liabilitiesto equity $— $— $837 $837 See accompanying notes.F-6Table of ContentsVerastem, Inc.(A development stage company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Nature of business Verastem, Inc. (the "Company"), incorporated on August 4, 2010 as a Delaware corporation, is a biopharmaceutical company focused ondiscovering and developing proprietary small molecule drugs targeting cancer stem cells along with proprietary companion diagnostics. The Company'soperations to date have been limited to organizing and staffing the Company, business planning, raising capital, acquiring and developing its technology,identifying potential product candidates and undertaking preclinical studies of its most advanced product candidates. The Company has not commencedits planned principal operations. Accordingly, the Company is considered to be in the development stage as defined in Financial Accounting StandardsBoard Accounting Standards Codification Topic 915, Development Stage Entities. The Company is subject to a number of risks similar to other life science companies in the development stage, including, but not limited to, theneed to obtain adequate additional funding, possible failure of preclinical testing or clinical trials, inability to obtain marketing approval of productcandidates, competitors developing new technological innovations, market acceptance of the Company's products and protection of proprietarytechnology. If the Company does not successfully commercialize any of its product candidates, it will be unable to generate product revenue or achieveprofitability. As of December 31, 2012, the Company had a deficit accumulated during the development stage of $46.5 million. The Company expects tocontinue to incur operating losses in future periods. The Company had cash, cash equivalents and investments of $91.5 million as of December 31,2012. The Company believes that its existing cash, cash equivalents and investments will be sufficient to fund its current operating plan and capitalexpenditure requirements for at least the next 12 months.Initial public offering In February 2012, the Company closed the initial public offering (IPO) of its common stock pursuant to a registration statement on Form S-1, asamended. An aggregate of 6,325,000 shares of common stock registered under the registration statement were sold at a price of $10.00 per share,including the over-allotment option. Net proceeds of the IPO were $56.8 million. All shares of the Company's Redeemable Convertible Preferred Stockwere converted into 11,740,794 shares of common stock as part of the IPO.Reverse stock split In January 2012, the Company's board of directors and stockholders approved a one-for-3.5 reverse stock split of the Company's common stock.The reverse stock split became effective on January 10, 2012. All share and per share amounts in the financial statements have been retroactivelyadjusted for all periods presented to give effect to the reverse stock split, including reclassifying an amount equal to the reduction in par value toadditional paid-in capital.2. Significant accounting policiesBasis of consolidation The information reported within the Company's financial statements from August 4, 2010 to December 31, 2011 was based solely on the accountsof Verastem, Inc. Effective December 2012, Verastem Securities Company was incorporated as a wholly owned subsidiary of the Company. EffectiveDecember 2012, all financial information presented has been consolidated and includes the accounts ofF-7Table of ContentsVerastem, Inc.(A development stage company)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)2. Significant accounting policies (Continued)the Company and its wholly owned subsidiary. All intercompany balances and transactions have been eliminated in consolidation.Use of estimates The preparation of the Company's financial statements in conformity with GAAP requires management to make estimates and assumptions thataffect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, management evaluates its estimates, includingestimates related to accruals and stock-based compensation expense. The Company bases its estimates on historical experience and other market-specificor other relevant assumptions that it believes to be reasonable. Actual results could differ from such estimates. Prior to becoming a public company in February 2012, the Company utilized significant estimates and assumptions in determining the fair value ofits common stock. The Company granted stock options at exercise prices not less than the fair market value of its common stock as determined by theboard of directors, with input from management. The board of directors determined the estimated fair value of the Company's common stock based on anumber of objective and subjective factors, including external market conditions affecting the biotechnology industry sector and the prices at which theCompany sold shares of redeemable convertible preferred stock, the superior rights and preferences of securities senior to the Company's commonstock at the time and the likelihood of achieving a liquidity event, such as an IPO or sale of the Company. The Company utilized various valuation methodologies in accordance with the framework of the American Institute of Certified PublicAccountants Technical Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation, to estimate the fair value of itscommon stock. The methodologies included an asset-based approach and the current value method for the Company's initial common stock valuation asof November 30, 2010, the option pricing method utilizing the reverse backsolve method to estimate the Company's underlying equity value as ofJuly 31, 2011 and a methodology that determined an estimated value under an IPO scenario and a sale scenario based upon an assessment of theprobability of occurrence of each scenario as of September 30, 2011, November 17, 2011, and December 31, 2011. Each valuation methodologyincluded estimates and assumptions that required the Company's judgment. These estimates included assumptions regarding future performance,including the successful completion of preclinical studies and clinical trials and the time to completing an IPO or sale. Significant changes to the keyassumptions used in the valuations could result in different fair values of common stock at each valuation date.Segment and geographic information Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chiefoperating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company views itsoperations and manages its business in one operating segment, which is the business of developing drugs that target cancer stem cells. The Companyoperates in only one geographic area.F-8Table of ContentsVerastem, Inc.(A development stage company)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)2. Significant accounting policies (Continued)Cash and cash equivalents The Company considers all highly liquid investments with an original or remaining maturity of three months or less at the date of purchase to becash equivalents. Cash equivalents consist of money market funds, U.S. agency notes and corporate bonds. Cash equivalents are reported at fair value.Fair value of financial instruments The Company is required to disclose information on all assets and liabilities reported at fair value that enables an assessment of the inputs used indetermining the reported fair values. The fair value hierarchy prioritizes valuation inputs based on the observable nature of those inputs. The fair valuehierarchy applies only to the valuation inputs used in determining the reported fair value of the investments and is not a measure of the investment creditquality. The hierarchy defines three levels of valuation inputs: The following table presents information about the Company's financial assets that have been measured at fair value at December 31, 2012 andindicates the fair value hierarchy of the valuation inputs utilized to determine fair value (in thousands).F-9Level 1 inputs Quoted prices in active markets for identical assets or liabilitiesLevel 2 inputs Inputs other than quoted prices included within Level 1 that are observable for the asset orliability, either directly or indirectlyLevel 3 inputs Unobservable inputs that reflect the Company's own assumptions about the assumptions marketparticipants would use in pricing the asset or liabilityDescription Total Quoted pricesin activemarkets(Level 1) Significantotherobservableinputs(Level 2) Significantunobservableinputs(Level 3) Financial assets Cash equivalents $8,171 $8,171 $— $— Short-term investments 46,480 — 46,480 — Long-term investments 34,944 — 34,944 — Total financial assets $89,595 $8,171 $81,424 $— Table of ContentsVerastem, Inc.(A development stage company)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)2. Significant accounting policies (Continued) The following table presents information about the Company's financial assets that have been measured at fair value at December 31, 2011 andindicates the fair value hierarchy of the valuation inputs utilized to determine such fair value (in thousands). In connection with the license agreement with Poniard Pharmaceuticals Inc. (Poniard), the Company is obligated to issue a warrant to Poniard forthe purchase of the Company's common stock upon the first patient dosing using a product licensed under the agreement with Poniard; such warrantwill have a three year term from the date of issuance. Prior to the Company's initial public offering, the exercise price of the warrant would have beenequal to the fair value of the common stock on the date of the most recent preferred stock financing prior to the issuance of the warrant. Upon thecompletion of the Company's initial public offering in January 2012, the exercise price of the warrant will be equal to the average closing price of theCompany's common stock during the five trading days preceding the issuance of the warrant. Prior to January 2012, the obligation to issue the warrant was a level 3 liability because its value measurement was based, in part, on significantinputs not observed in the market and reflects the Company's assumptions as to the expected warrant exercise price and the expected volatility of theCompany's common stock. The obligation to issue the warrant was initially recorded at fair value and, prior to the Company's initial public offering, wasrevalued at the end of each reporting period, with the change in the fair value reported in research and development expense within the statement ofoperations. Upon the completion of the Company's initial public offering, the obligation to issue the warrant met the definition of an equity-classifiedderivative instrument since the remaining variable inputs were consistent with those in a fixed for fixed forward option agreement, and was thereforerevalued as of January 26, 2012 with the change in fair value reported in research and development expense within the statement of operations. The fairvalue of the obligation to issue the warrant was then reclassified from liabilities to additional paid-in-capital on the Company's consolidated balancesheet. The Company will reassess the equity classification of the obligation to issue the warrant upon a change in facts and circumstances in futurereporting periods. As of December 31, 2011, the most recent issuance of the Company's Preferred Stock had been the issuance of the Series C Preferred Stock inNovember 2011. The Company estimated the value ofF-10Description Total Quoted pricesin activemarkets(Level 1) Significantotherobservableinputs(Level 2) Significantunobservableinputs(Level 3) Financial assets Cash equivalents $4,102 $3,102 $1,000 $— Short-term investments 26,857 — 26,857 — Long-term investments 8,994 — 8,994 — Total financial assets $39,953 $3,102 $36,851 $— Financial liabilities Obligation to issue warrant $406 $— $— $406 Total financial liabilities $406 $— $— $406 Table of ContentsVerastem, Inc.(A development stage company)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)2. Significant accounting policies (Continued)the obligation to issue the warrant using a probability-weighted scenario analysis that incorporated the probability of the completion of an initial publicoffering. The analysis included estimating the stock price on each measurement date assuming that achievement of the milestone would be 100%probable. The estimated stock price contingent upon milestone achievement was determined by analyzing the post-announcement returns for publiccompanies that progressed to Phase 1 clinical trials. The following inputs were used to determine the fair value of the obligation to issue the warrant: As of December 31, 2011, the fair value of the obligation to issue the warrant was recorded at $406,000. As a result of the change in inputs to thevaluation model, the fair value of the obligation to issue the warrant increased by $431,000 to $837,000 at January 26, 2012. Reasonable changes in theassumptions used to calculate the fair value of the obligation to issue the warrant would not result in significant changes in the fair value.Investments Investments and cash equivalents consist of investments in money market accounts, government-sponsored enterprise securities and commercialpaper of publicly traded companies secured by the U.S. government that are classified as available-for-sale pursuant to Accounting StandardsCodification (ASC) 320, Investments—Debt and Equity Securities. The Company classifies investments available to fund current operations as currentassets on its balance sheets. Investments are classified as long-term assets on the balance sheets if (i) the Company has the intent and ability to hold theinvestments for a period of at least one year and (ii) the contractual maturity date of the investments is greater than one year. Investments are carried atfair value with unrealized gains and losses included as a component of accumulated other comprehensive loss, which is a separate component ofstockholders' equity (deficit), until such gains and losses are realized. The fair value of these securities is based on quoted prices for identical or similarassets. If a decline in the fair value is considered other-than-temporary, based on available evidence, the unrealized loss is transferred from othercomprehensive loss to the statement of operations. There were no other-than-temporary declines in fair value of short-term or long-term investments forthe period from August 4, 2010 (inception) to December 31, 2010, the year ended December 31, 2011 and the year ended December 31, 2012. Realizedgains and losses are determined using the specific identification method and are included in interest income in the statement of operations. There were norealized gains or losses recognized for the period from August 4, 2010F-11 December 31, 2011 January 26, 2012 Non-IPO IPO Exercise price $11.09 $6.86 $10.00 Estimated stock price contingent upon milestoneachievement $12.60 $3.22 $8.54 Expected term 4.0 years 4.1 years 4.1 years Volatility 75% 70% 70%Dividend yield 0.00% 0.00% 0.00%Risk-free rate 0.54% 0.60% 0.60%Probability of achieving milestone 80% 80% 80%Probability of scenario 100% 20% 80%Table of ContentsVerastem, Inc.(A development stage company)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)2. Significant accounting policies (Continued)(inception) to December 31, 2010, the year ended December 31, 2011 and the year ended December 31, 2012. The Company reviews investments for other-than-temporary impairment whenever the fair value of an investment is less than the amortized costand evidence indicates that an investment's carrying amount is not recoverable within a reasonable period of time. To determine whether an impairmentis other-than-temporary, the Company considers the intent to sell, or whether it is more likely than not that the Company will be required to sell, theinvestment before recovery of the investment's amortized cost basis. Evidence considered in this assessment includes reasons for the impairment,compliance with the Company's investment policy, the severity and the duration of the impairment and changes in value subsequent to year end. As ofDecember 31, 2011 and 2012, there were no investments with a fair value that was significantly lower than the amortized cost basis or any investmentsthat had been in an unrealized loss position for a significant period. As of December 31, 2012, cash, cash equivalents and investments included (in thousands):F-12 AmortizedCost GrossUnrealizedGains GrossUnrealizedLosses FairValue Cash and cash equivalents: Cash and money market accounts $10,096 $— $— $10,096 Government-sponsored enterprise securities — — — — Total cash and cash equivalents $10,096 $— $— $10,096 Investments: Government-sponsored enterprise securities (due within 1 year) $44,480 $14 $(3)$44,491 Government-sponsored enterprise securities (due within 1 - 2 years) 36,920 14 (1) 36,933 Total investments $81,400 $28 $(4)$81,424 Total cash, cash equivalents, and investments $91,496 $28 $(4)$91,520 Table of ContentsVerastem, Inc.(A development stage company)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)2. Significant accounting policies (Continued) As of December 31, 2011, cash, cash equivalents and investments included (in thousands):Concentrations of credit risk and off-balance sheet risk Cash and cash equivalents and investments are financial instruments that potentially subject the Company to concentrations of credit risk. As ofDecember 31, 2012, the Company's cash, cash equivalents and investments were deposited at two financial institutions. The Company maintains itscash and cash equivalents and investments with high quality, accredited financial institutions and, accordingly, the Company believes it is not exposed toany significant credit risk on these funds. The Company has no significant off-balance sheet concentrations of credit risk, such as foreign currencyexchange contracts, option contracts or other hedging arrangements.Property and equipment Property and equipment consists of laboratory equipment, office furniture, and computer equipment. Expenditures for repairs and maintenance arerecorded to expense as incurred, whereas major betterments are capitalized as additions to property and equipment. Depreciation is calculated using thestraight-line method over the following estimated useful lives of the assets: Upon retirement or sale, the cost of the disposed asset and the related accumulated depreciation are removed from the accounts and any resultinggain or loss is recognized. The Company reviews its long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying valueof assets may not be recoverable. Recoverability isF-13 AmortizedCost GrossUnrealizedGains GrossUnrealizedLosses FairValue Cash and cash equivalents: Cash and money market accounts $19,954 $— $— $19,954 Government-sponsored enterprise securities 1,000 — — 1,000 Total cash and cash equivalents $20,954 $— $— $20,954 Investments: Government-sponsored enterprise securities (due within 1 year) $10,900 $2 $(1)$10,901 Government-sponsored enterprise securities (due within 1 - 2 years) 8,998 1 (5) 8,994 Commercial paper secured by the U.S. government (due within1 year) 15,954 3 (1) 15,956 Total investments $35,852 $6 $(7)$35,851 Total cash, cash equivalents, and investments $56,806 $6 $(7)$56,805 Laboratory equipment 5 yearsFurniture 5 yearsComputer equipment 3 yearsTable of ContentsVerastem, Inc.(A development stage company)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)2. Significant accounting policies (Continued)measured by comparison of the asset's book value to future net undiscounted cash flows that the assets are expected to generate. If such assets areconsidered to be impaired, the impairment to be recognized is measured by the amount by which the book value of the assets exceed their fair value,which is measured based on the projected discounted future net cash flows arising from the assets. No such impairment losses have been recordedthrough December 31, 2012.Organizational costs All organizational costs have been expensed as incurred.Research and development costs The Company expenses research and development costs to operations as incurred. Research and development expenses consist of costs associatedwith research activities, including drug discovery efforts and the development of therapeutic product candidates and companion diagnostics. TheCompany accounts for nonrefundable advance payments for goods and services that will be used in future research and development activities asexpenses when the service has been performed or when the goods have been received rather than when the payment is made. Research and developmentexpenses consist of:•employee-related expenses, including salaries, benefits, travel and stock-based compensation expense; •external research and development expenses incurred under arrangements with third parties, such as contract research organizations, orCROs, manufacturing organizations and consultants, including the scientific advisory board; •license fees; and •facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, depreciationof equipment, and laboratory supplies.Stock-based compensation The Company expenses the fair value of employee stock options over the requisite service period, which is the vesting period. Compensationexpense is measured using the fair value of the award at the grant date, net of estimated forfeitures, and is adjusted annually to reflect actual forfeitures.The grant date fair value of each stock-based award is estimated using the Black-Scholes option pricing model and is expensed on a straight-line basisover the vesting period. Stock-based awards issued to nonemployees, including directors for non-board related services, are accounted for based on the fair value of suchservices received or of the equity instruments issued, whichever is more reliably measured. Stock option awards are revalued at each vesting date usingthe Black-Scholes option pricing model and are expensed on a straight-line basis over the vesting period. Prior to becoming a public company, the exercise prices for options granted were set by the board of directors, the members of which haveextensive experience in the life science industry, with input from management of the Company, based on the board's determination of fair value of thecommon stock at the time of the grants. The Company performed contemporaneous valuations, utilizing aF-14Table of ContentsVerastem, Inc.(A development stage company)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)2. Significant accounting policies (Continued)combination of valuation methods described in the American Institute of Certified Public Accountants Technical Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, (Practice Aid).Income taxes The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future taxconsequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basesusing enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Tax benefits are recognized when it is morelikely than not that a tax position will be sustained during an audit. Deferred tax assets are reduced by a valuation allowance if current evidence indicatesthat it is considered more likely than not that these benefits will not be realized.Net loss per share Basic and diluted net loss per common share is calculated by dividing net loss applicable to common stockholders by the weighted-average numberof common shares outstanding during the period, without consideration for common stock equivalents. The Company's potentially dilutive shares,which include redeemable convertible preferred stock, outstanding stock options, restricted stock units, and unvested restricted stock are considered tobe common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive. The following potentially dilutive securities were excluded from the calculation of diluted net loss per share due to their anti-dilutive effect:F-15 Period fromAugust 4, 2010(inception) toDecember 31,2010 Period fromAugust 4, 2010(inception) toDecember 31,2012 Years Ended December 31, 2011 2012 Preferred Stock 1,142,857 11,740,794 — — Outstanding stock options 177,143 405,141 1,424,241 1,424,241 Restricted stock units — — 899,204 899,204 Unvested restricted stock 2,008,926 1,434,734 747,000 747,000 3,328,926 13,580,669 3,070,445 3,070,445 Table of ContentsVerastem, Inc.(A development stage company)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)3. Property and equipment Property and equipment and related accumulated depreciation are as follows (in thousands): Total depreciation expenses amounted to $0, $83,000, $207,000 and $290,000 for the period from August 4, 2010 (inception) to December 31,2010, the year ended December 31, 2011, the year ended December 31, 2012 and the period from August 4, 2010 (inception) to December 31, 2012,respectively.4. Prepaid expenses and other current assets Prepaid expenses and other current assets consist of the following (in thousands):5. Accrued expenses Accrued expenses are as follows (in thousands):F-16 December 31,2011 December 31,2012 Laboratory equipment $721 $1,017 Computer equipment 27 27 Furniture 44 44 792 1,088 Less: accumulated depreciation (83) (277) $709 $811 December 31,2011 December 31,2012 Prepaid contract research organization costs $— $274 Interest receivable 53 161 Prepaid other 77 71 $130 $506 December 31, 2011 2012 Professional fees $520 $183 Compensation and related benefits 86 173 Contract research organization costs 217 69 Consulting — 36 Deferred rent 27 36 Other 23 54 $873 $551 Table of ContentsVerastem, Inc.(A development stage company)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)6. Redeemable convertible preferred stock On February 1, 2012, immediately prior to the closing of the Company's initial public offering, all outstanding shares of the Company's redeemableconvertible preferred stock were converted into 11,740,794 shares of common stock. As of December 31, 2012, the Company does not have anyredeemable convertible preferred stock authorized, issued, or outstanding. Prior to the closing of the initial public offering, the Company's redeemable preferred stock consisted of the following (in thousands except shareand per share amounts): In November 2010, the Company sold 4 million shares of Series A redeemable convertible preferred stock (Series A Preferred Stock) at a price of$1.00 per share for gross proceeds of $4 million. In accordance with the terms of the Series A Stock Purchase Agreement, the Company sold anadditional 12 million shares at $1.00 per share in a second subsequent closing. The Company incurred approximately $79,000 of issuance costs as partof the first closing of the Series A Preferred Stock. No additional issuance costs were incurred as part of the second closing. In July 2011, the Company sold approximately 16 million shares of series B redeemable convertible preferred stock (Series B Preferred Stock) at aprice of $2.00 per share for gross proceeds of approximately $32 million. The Company incurred approximately $113,000 of issuance costs as part ofthe closing of the Series B Preferred Stock. In November 2011, the Company sold approximately 9.1 million shares of Series C redeemable convertible preferred stock (Series C PreferredStock) at a price of $2.25 per share for gross proceeds of $20.4 million. The Company incurred approximately $153,000 of issuance costs as part of theclosing of the Series C Preferred Stock. The issuance costs associated with the Series A Preferred Stock, Series B Preferred Stock and Series CPreferred Stock (collectively, the Preferred Stock) were accreted through the earliest redemption date. The Company assessed the Preferred Stock for any beneficial conversion features or embedded derivatives that would require bifurcation from thePreferred Stock and receive separate accounting treatment. On the date of each issuance, the value of the common stock into which the Preferred Stockwas convertible had a fair value less than the effective conversion price of the Preferred Stock and, asF-17 As ofDecember 31, 2011 2012 Series A redeemable convertible preferred stock, $0.0001 par value; 16,000 and no sharesauthorized, 16,000 and no shares issued and outstanding at December 31, 2011 and 2012,respectively (Liquidation preference of $16,000 as of December 31, 2011) 15,939 — Series B redeemable convertible preferred stock, $0.0001 par value; 16,025 and no sharesauthorized, 16,025 and no shares issued and outstanding at December 31, 2011 and 2012,respectively (Liquidation preference of $32,050 as of December 31, 2011) 31,948 — Series C redeemable convertible preferred stock, $0.0001 par value; 9,068 and no sharesauthorized,9,068 and no shares issued and outstanding at December 31, 2011 and 2012,respectively (Liquidation preference of $20,403 as of December 31, 2011) 20,254 — $68,141 $— Table of ContentsVerastem, Inc.(A development stage company)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)6. Redeemable convertible preferred stock (Continued)such, there was no intrinsic value on the respective commitment dates. No embedded derivatives were identified that would require bifurcation.7. Common stock As of December 31, 2012 and December 31, 2011, the Company had reserved the following shares of common stock for the potential conversionof outstanding Preferred Stock, the issuance of common stock for vested restricted stock units and the exercise of stock options (in thousands): Each share of common stock is entitled to one vote, subject to certain voting rights of the Preferred Stock as discussed in Note 6. The holders ofthe common stock are also entitled to receive dividends whenever funds are legally available and when declared by the board of directors, subject to theprior rights of the Preferred Stockholders.8. Stock-based compensation Stock-based compensation expense as reflected in the Company's consolidated statements of operations and comprehensive loss was as follows (inthousands): The Company maintains two equity compensation plans, the 2012 Incentive Plan (the "2012 Plan") and the 2010 Equity Incentive Plan (the "2010Plan"). Terms of stock award agreements, including vesting requirements, are determined by the board of directors, subject to the provisions of theindividual plans. To date, most options granted by the Company vest twenty five percent (25%) one year from vesting start date and seventy-fivepercent (75%) in equal installments over the subsequent twelve quarters (subject to acceleration of vesting in the event of certain change of controltransactions) and are exercisable from the date of grant for a period of ten years.F-18 December 31,2011 December 31,2012 Series A Preferred Stock 4,571 — Series B Preferred Stock 4,579 — Series C Preferred Stock 2,591 — Shares reserved under equity compensation plans 563 3,930 12,304 3,930 Period fromAugust 4, 2010(Inception) toDecember 31,2010 Year EndedDecember 31, Period fromAugust 4, 2010(Inception) toDecember 31,2012 2011 2012 Research and development $24 $981 $2,956 $3,961 General and administrative 28 654 4,444 5,126 Total stock-based compensation expense $52 $1,635 $7,400 $9,087 Table of ContentsVerastem, Inc.(A development stage company)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)8. Stock-based compensation (Continued)2012 Incentive Plan In December 2011, the Company adopted the 2012 Plan. The 2012 Plan became effective immediately upon the closing of the Company's IPO inFebruary 2012. Upon effectiveness of the 2012 Plan, the Company ceased making awards under the 2010 Plan. The 2012 Plan allows the Company togrant awards for up to 3,428,571 shares of common stock plus the number of shares of common stock available for grant under the 2010 Plan as of theeffectiveness of the 2012 Plan (which was an additional 30,101 shares) plus that number of shares of common stock related to awards outstandingunder the 2010 Plan which terminate by expiration, forfeiture, cancellation or otherwise. The 2012 Plan includes an "evergreen provision" that allowsfor an annual increase in the number of shares of common stock available for issuance under the 2012 Plan. The annual increase will be added on thefirst day of each year beginning in 2013 and each subsequent anniversary until the expiration of the 2012 Plan, equal to the lowest of 1,285,714 sharesof common stock, 4.0% of the number of shares of common stock outstanding and an amount determined by the board of directors. Awards under the2012 Plan may include the following award types: incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock awards,restricted stock units (RSUs), other stock-based or cash-based awards and any combination of the foregoing. As of December 31, 2012, under the 2012Plan, the Company has granted stock options for 1,039,714 shares of common stock, of which 8,328 have been forfeited and restricted stock units for909,918 shares of common stock, of which 10,714 have been forfeited. The exercise price of each option has been equal to the closing price of a shareof our common stock on the grant date.2010 Equity Incentive Plan In November 2010, the Company adopted the 2010 Plan, under which it was authorized to grant stock-based awards to purchase up to 404,762shares of common stock to eligible employees, officers, directors and consultants. In March 2011, the 2010 Plan was amended to increase the aggregatenumber of shares of common stock available to be issued under the 2010 Plan to 571,242 shares of common stock. As of December 31, 2012, a total of405,141 options and 256,000 restricted stock awards have been granted, 5,395 options have been exercised and 126,891 have been forfeited andrepurchased, under the 2010 Plan. As of February 2012, the Company ceased making awards under the 2010 Plan and the remaining 30,101 sharesavailable for future grants were added to the total number of shares reserved for issuance under the 2012 Plan. For options granted under the 2010 Plan,the exercise price equaled the estimated fair value of the common stock as determined by the board of directors on the date of grant.Restricted common stock In connection with the Company's formation, the founders purchased an aggregate of 2,857,138 shares of Company common stock at fair value onthe date of issuance. The shares were issued subject to restricted stock agreements between the Company and each founder, which allow the Company,at its discretion, to repurchase unvested shares if the founder's relationship with the Company is terminated. Under these agreements, twenty fivepercent (25%) of the shares vested immediately, and the remaining seventy-five percent (75%) of shares vest ratably in quarterly installments over thesubsequent four years.F-19Table of ContentsVerastem, Inc.(A development stage company)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)8. Stock-based compensation (Continued) The Company records stock-based compensation expense for the common stock subject to repurchase, or restricted common stock grants, basedon the grant date intrinsic value for employees and the vesting date intrinsic value for non-employees. All of the restricted shares were issued at fairvalue. The Company recorded stock-based compensation expense associated with restricted common stock grants of approximately $51,000,$1.4 million, $3.3 million and $4.8 million for the period August 4, 2010 (inception) to December 31, 2010, the year ended December 31, 2011, theyear ended December 31, 2012 and the period from August 4, 2010 (inception) to December 31, 2012, respectively. A summary of the Company's restricted stock activity and related information is as follows: The weighted-average grant date fair value of restricted stock granted during the period from August 4, 2010 (inception) to December 31, 2010,the year ended December 31, 2011 and the period from August 4, 2010 (inception) to December 31, 2012 was $0.00035, $0.28 and $0.02 per share,respectively. No restricted stock was granted during the year ended December 31, 2012. As of December 31, 2012, there was $4.2 million of totalunrecognized stock-based compensation expense related to unvested restricted stock. The Company expects to recognize this expense over a remainingweighted-average period of 1.75 years.Restricted stock units A summary of the Company's RSUs as of December 31, 2012 and changes during the year ended December 31, 2012 is as follows (in thousands,except per share data): As of December 31, 2012, there was $6.5 million of total unrecognized stock-based compensation expense related to unvested RSUs grantedunder the 2012 Plan. The expense is expected to be recognized over a weighted-average period of 3.0 years.F-20 Shares Weighted-averagefair valueper share Unvested at December 31, 2011 1,434,734 $0.02530 Granted — — Vested (542,421) 0.02920 Forfeited (145,313) 0.00035 Unvested at December 31, 2012 747,000 $0.02730 Shares Weighted-averagegrant datefair valueper share Unvested at December 31, 2011 — $— Granted 909,918 10.62 Vested (77,479) 9.68 Cancelled (10,714) 11.10 Unvested at December 31, 2012 899,204 $10.70 Table of ContentsVerastem, Inc.(A development stage company)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)8. Stock-based compensation (Continued) During 2012, the Company issued a restricted stock unit for 103,306 shares to an employee. The award vests up to 25% per year based on theachievement of stated objectives. The objectives related to 2012 were modified in December 2012 and the Company recorded expense of $126,000 inconnection with the modification.Stock Options A summary of the Company's stock option activity and related information follows: The fair value of each employee stock option was estimated at the date of grant using a Black-Scholes option-pricing model with the followingassumptions: The Company uses the simplified method as prescribed by the Securities and Exchange Commission Staff Accounting Bulletin Topic 14.D.2 tocalculate the expected term as it does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected termfor options granted to employees. The expected term is applied to the stock option grant group as a whole, as the Company does not expect substantiallydifferent exercise or post-vesting termination behavior among its employee population. The computation of expected volatility is based on the historicalvolatility of a representative group of public biotechnology and life sciences companies with similar characteristics to the Company, including earlystage of product development and therapeuticF-21 Shares Weighted-averageexercise price pershare Weighted-averageremainingcontractual term(years) Aggregateintrinsic value (inthousands) Outstanding at December 31,2011 405,141 $0.75 Granted 1,039,714 9.25 Exercised (5,395) 0.56 Cancelled (15,219) 6.50 Outstanding at December 31,2012 1,424,241 6.90 9.3 3,451 Vested at December 31,2012 384,712 6.00 9.0 1,343 Vested and expected to vestat December 31, 2012(1) 1,382,496 $6.87 9.3 3,415 (1)This represents the number of vested options as of December 31, 2012, plus the number of unvested options expected to vest asof December 31, 2012, based on the unvested options at December 31, 2012, adjusted for the estimated forfeiture rate. Period fromAugust 4, 2010(Inception) toDecember 31,2010 Year Ended December 31, 2011 2012Risk-free interest rate 2.0%1.1% - 2.7% 0.8% - 1.7%Volatility 67%69% - 70% 70% - 77%Dividend yield — — —Expected term (years) 6.1 6.25 5.3 - 6.1Table of ContentsVerastem, Inc.(A development stage company)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)8. Stock-based compensation (Continued)focus. Subsequent to the initial public offering, the Company began to use a blended volatility rate comprised of its own historical volatility and that ofthe representative group of companies. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected term ofthe stock options. Management assesses expected forfeitures based on the experience of the Company coupled with comparison to data from therepresentative group of companies and recognizes compensation costs only for those equity awards expected to vest. For the period from August 4, 2010 (inception) to December 31, 2010 the Company did not recognize any stock-based compensation foremployee stock option grants. The Company recorded stock-based compensation expense of $19,000 for the year ended December 31, 2011, and$1.6 million for the year ended December 31, 2012 and the period from August 4, 2010 (inception) to December 31, 2012, associated with employeestock options. The weighted-average grant date fair value of options granted in the period from August 4, 2010 (inception) to December 31, 2010, theyear ended December 31, 2011, the year ended December 31, 2012 and the period from August 4, 2010 (inception) to December 31, 2012 was $0.18,$0.75, $6.03 and $4.48 per share, respectively. At December 31, 2012, there was $5.4 million of total unrecognized compensation cost related to unvested stock options. As of December 31,2012, the Company expects to recognize this cost over a remaining weighted-average period of 3.0 years.9. Income taxes As of December 31, 2012 the Company had federal net operating loss carryforwards of approximately $31.9 million and state net operating losscarryforwards of $31.9 million, which are available to reduce future taxable income. The Company also had federal tax credits of $358,000 and state taxcredits of $229,000, which may be used to offset future tax liabilities. The net operating loss (NOL) and tax credit carryforwards will expire at variousdates through 2032. Net operating loss and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service andstate tax authorities and may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significantshareholders over a three-year period in excess of 50%, as defined under Sections 382 and 383 of the Internal Revenue Code, as well as similar stateprovisions. This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. The amount of theannual limitation is determined based on the value of the Company immediately prior to the ownership change. Subsequent ownership changes mayfurther affect the limitation in future years.F-22Table of ContentsVerastem, Inc.(A development stage company)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)9. Income taxes (Continued) A reconciliation of income taxes computed using the U.S. federal statutory rate to that reflected in operations follows: The principal components of the Company's deferred tax assets are as follows (in thousands): The Company has recorded a valuation allowance against its deferred tax assets at December 31, 2012 because the Company's managementbelieves that it is more likely than not that these assets will not be fully realized. The increase in the valuation allowance of $320,000, $4.9 million and$10.3 million in the period from August 4, 2010 (inception) to December 31, 2010, the years ended December 31, 2011 and 2012 primarily relates tothe net loss incurred by the Company. Upon inception, the Company adopted accounting guidance related to accounting for uncertainty in income taxes. The Company's reserves relatedto taxes are based on a determination of whether and how much of a tax benefit taken by the Company in its tax filings or positions is more likely thannot to be realized following resolution of any potential contingencies present related to the tax benefit. Upon adoption, the Company recognized nomaterial adjustment for unrecognized income tax benefits. As of the adoption date and through December 31, 2012, the Company had no unrecognizedtax benefits or related interest and penalties accrued. The Company has not, as yet, conducted a study of research and development (R&D) creditcarryforwards. This study may result in an adjustment to the Company's R&D credit carryforwards; however, until a study is completed and anyadjustment is known, no amounts are being presented as an uncertain tax position. A full valuation allowance has been provided against the Company'sR&D credits and, if an adjustment is required, this adjustmentF-23 Year endedDecember 31, 2011 2012 Income tax benefit using U.S. federal statutory rate 34.00% 34.00%State income taxes, net of federal benefit 4.78% 4.61%Research and development tax credits 1.65% —%Permanent items (4.78)% (5.96)%Change in the valuation allowance (35.65)% (32.19)%Other —% (0.46)% —% —% December 31, 2011 2012 Deferred tax assets: Net operating loss carryforwards $4,562 $12,532 Capitalized research and development 148 1,664 Research and development credits 385 508 Stock-based compensation 82 797 Other 20 (23) Gross deferred tax assets 5,197 15,478 Valuation allowance (5,197) (15,478) Net deferred tax asset $— $— Table of ContentsVerastem, Inc.(A development stage company)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)9. Income taxes (Continued)would be offset by an adjustment to the valuation allowance. Thus, there would be no impact to the consolidated balance sheet or statement ofoperations if an adjustment were required. The Company would recognize both accrued interest and penalties related to unrecognized benefits in incometax expense. The Company's uncertain tax positions are related to years that remain subject to examination by relevant tax authorities. Since theCompany is in a loss carryforward position, the Company is generally subject to examination by the U.S. federal, state and local income tax authoritiesfor all tax years in which a loss carryforward is available.10. Commitments and contingencies From November 2010 through May 2011, the Company leased office space from a shareholder. There was no formal lease arrangement with theshareholder. Rent paid to the shareholder was $12,000, $34,000, and none for the period from August 4, 2010 (inception) to December 31, 2010, theyear ended December 31, 2011 and the year ended December 31, 2012, respectively. In May 2011, the Company entered into a non-cancelable operating lease for office and laboratory space, which expires October 31, 2014. Thelease agreement provides for free rent for the first four months of the lease term and includes escalating rent payments. The rent expense is recorded ona straight-line basis over the lease term. The Company is also obligated to pay for certain operating costs and a proportional share of certain commonarea costs. The Company has the right to extend the lease for a two-year period. The annual rent for each additional year is determined annually at thethen fair market rate. The Company secured a letter of credit for $86,000 in connection with the lease, which is included in restricted cash on the balancesheet. The minimum aggregate future lease commitments are as follows (in thousands): The Company recorded rent expense of $12,000, $251,000, $323,000 and $786,000 for the period from August 4, 2010 (inception) toDecember 31, 2010, the year ended December 31, 2011, the year ended December 31, 2012 and the period from August 4, 2010 (inception) toDecember 31, 2012, respectively. Pursuant to the terms of various agreements, the Company may be required to pay various development, regulatory and commercial milestones. Inaddition, if any products related to these agreements are approved for sale, the Company may be required to pay significant royalties on future sales. Thepayment of these amounts, however, is contingent upon the occurrence of various future events, which have a high degree of uncertainty of occurring.11. License agreements In October 2010, the Company entered into an exclusive license agreement, which was amended and restated in January 2012, with the WhiteheadInstitute for Biomedical Research (the Licensor) for certain intellectual property. The Company paid the Licensor an upfront license fee and reimbursedpatent related fees and costs incurred by the Licensor and affiliates of the Licensor totaling $104,000 in the aggregate and issued 166,664 shares ofcommon stock to the Licensor and entities and individualsF-242013 360 2014 307 $667 Table of ContentsVerastem, Inc.(A development stage company)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)11. License agreements (Continued)affiliated with the Licensor. The fair value of the common stock was determined to be $0.28 per share, and the fair value was determined to be morereadily determinable than the fair value of the license. As a result, the fair value of the shares of approximately $46,000 was recorded as research anddevelopment expense. Under the terms of the agreement, the Company also agreed to pay annual license maintenance fees, milestone payments,royalties as a percentage of net sales and a percentage of sublicense income the Company receives. Annual license maintenance fees are creditableagainst royalties earned during the same calendar year and are not material to the financial statements. Milestone payments are triggered upon theachievement of specified development, regulatory and commercialization milestones and are not creditable against royalties. Actual amounts due underthe agreement will vary depending on the number of products developed, the type and development path of the products, and other related factors.Milestone payments could total up to $1.6 million. The Company may terminate the agreement at any time with 90 days' prior written notice. On December 16, 2011, the Company amended and restated an existing non-exclusive license agreement with the Licensor pursuant to which theCompany obtained an exclusive license to certain intellectual property. The Company paid the Licensor an upfront license fee and agreed to makemilestone payments of up to $825,000 upon the achievement of specified regulatory and commercialization milestones. In addition, the Company agreedto pay royalties as a percentage of net sales of licensed products. On November 17, 2011, the Company entered into an exclusive, worldwide license agreement with Poniard Pharmaceuticals, Inc. to develop,make, use and sell compounds and products covered by the licensed patent rights for the diagnosis, treatment, prevention or control of human diseasesand conditions. Under the agreement, the Company paid an upfront license fee and agreed to pay $13.3 million upon the achievement of specifieddevelopment and regulatory milestones. The Company also agreed to issue to Poniard a warrant to purchase 142,857 shares of common stock upon thefirst dosing of the first patient in a Phase 1 clinical trial of a licensed product. The exercise price of such warrant would be equal to the average closingprice of the Company's common stock during the five trading days preceding such issue date. In addition, the Company agreed to pay royalties as apercentage of net sales of licensed products. The Company may terminate the agreement at any time with 90 days' prior written notice. On May 11, 2012, the Company acquired from S*Bio Pte Ltd (S*Bio), compounds identified as dual inhibitors of PI3K and mTOR, includingrelated patent rights. Under the agreement, the Company paid S*Bio an upfront fee of $350,000 and has agreed to pay S*Bio milestone payments of upto an aggregate of approximately $21.0 million upon the achievement of specified development and regulatory milestones. In addition, the Companyagreed to pay to S*Bio tiered, low to mid single digit royalties as a percentage of annual net sales of each product containing an acquired compound asan ingredient. The obligation to pay royalties continues on a product by product and country by country basis until the expiration of all acquired patentrights covering the product in such country. If the Company obtains a license from a third party in order to commercialize an acquired compoundcontained in a product in a particular country, then the Company may deduct up to 50% of the amount paid to such third party from the royaltypayments that Company owes to S*Bio for such product. The deduction is subject to specified limitations, including that in no event will any suchdeduction reduce a royalty payment owed to S*Bio by more than 50% as a result of all such deductions in the aggregate. There were no ongoing clinicaltrials at the time of the acquisition of the compounds, and the compounds acquired do not have alternative future uses, nor have they reached a stage ofF-25Table of ContentsVerastem, Inc.(A development stage company)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)11. License agreements (Continued)technological feasibility. As no process or activities were acquired, the Company accounted for the transaction as an asset acquisition by recording the$350,000 payment made to S*Bio to research and development expense for the year ended December 31, 2012. On July 11, 2012, the Company entered into a license agreement with Pfizer Inc. (Pfizer), under which Pfizer granted the Company worldwide,exclusive rights to research, develop, manufacture and commercialize products containing certain of Pfizer's inhibitors of focal adhesion kinase(Products) for all therapeutic, diagnostic and prophylactic uses in humans. The Company is solely responsible, at its expense, for the clinicaldevelopment of the Products, which is to be conducted in accordance with an agreed-upon development plan. The Company is also responsible for allmanufacturing and commercialization activities at its own expense. Pfizer is required to provide the Company with an initial quantity of clinical supplyof one of the Products for an agreed upon price. Under the agreement, the Company made a one-time cash payment to Pfizer in the amount of$1.5 million and issued to Pfizer 192,012 shares of its common stock. Pfizer is also eligible to receive up to $2 million in developmental milestones andup to an additional $125 million based on the successful attainment of regulatory and commercial sales milestones. Pfizer is also eligible to receive highsingle to mid double digit royalties on future net sales of Products. The Company's royalty obligations with respect to each Product in each countrybegin on the date of first commercial sale of the Product in that country, and end on the later of 10 years after the date of first commercial sale of theProduct in that country or the date of expiration or abandonment of the last claim contained in any issued patent or patent application licensed by Pfizerto the Company that covers the Product in that country. The Company accounted for the license agreement as the licensing of in-process research anddevelopment with no alternative future use. Accordingly, the Company recorded research and development expense for the year ended December 31,2012 associated with the cash payment of $1.5 million and the fair value of shares of common stock issued to Pfizer of $2.0 million.12. Employee benefit plan In June 2011, the Company adopted a 401(k) retirement and savings plan (the 401(k) Plan) covering all employees. The 401(k) Plan allowsemployees to make pre-tax or post-tax contributions up to the maximum allowable amount set by the IRS. Under the 401(k) Plan, the Company maymake discretionary contributions as approved by the board of directors. The Company made contributions to the 401(k) Plan of $0, $46,000, $116,000and $162,000 for the period from August 4, 2010 (inception) to December 31, 2010, the year ended December 31, 2011, the year ended December 31,2012 and the period from August 4, 2010 (inception) to December 31, 2012, respectively.F-26Table of ContentsVerastem, Inc.(A development stage company)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)13. Quarterly Financial Information (unaudited, in thousands, except per share data) F-27 First QuarterEndedMarch 31,2012 Second QuarterEndedJune 30,2012 Third QuarterEndedSeptember 30,2012 Fourth QuarterEndedDecember 31,2012 Operating expenses: Research and development $4,803 $4,683 $8,132(b)$4,094 General and administrative 2,125 2,213 2,298 3,882 Total operating expenses 6,928 6,896 10,430 7,976 Loss from operations (6,928) (6,896) (10,430) (7,976)Interest income 57 71 63 55 Net loss $(6,871)$(6,825)$(10,367)$(7,921) Net loss per share applicable to commonstockholders-basic and diluted $(0.47)$(0.34)$(0.51)$(0.39)Weighted average number of commonshares used in net loss per shareapplicable to common stockholders-basic and diluted 14,693(a) 19,863 20,160 20,309 First QuarterEndedMarch 31,2011 Second QuarterEndedJune 30,2011 Third QuarterEndedSeptember 30,2011 Fourth QuarterEndedDecember 31,2011 Operating expenses: Research and development $675 $1,726 $3,082 $4,400 General and administrative 471 759 965 1,620 Total operating expenses 1,146 2,485 4,047 6,020 Loss from operations (1,146) (2,485) (4,047) (6,020)Interest income — — — 15 Net loss $(1,146)$(2,485)$(4,047)$(6,005) Net loss per share applicable to commonstockholders-basic and diluted $(1.06)$(2.03)$(2.98)$(4.01)Weighted average number of commonshares used in net loss per shareapplicable to common stockholders-basic and diluted 1,089 1,225 1,361 1,500 (a)In February 2012, the Company completed its initial public offering, which resulted in net proceeds of approximately$56.8 million from the issuance of 6,325,000 shares of common stock, which includes the sale of 825,000 shares under theunderwriters' over-allotment option. In connection with the initial public offering, all of the outstanding shares of the Company'sredeemable convertible preferred stock were converted into 11,740,794 of common stock. (b)In the quarter ended September 30, 2012, the Company paid a license fee of $1.5 million in cash and issued 192,012 shares ofthe Company's common stock, which were valued at $2.0 million on the date of issuance.Table of ContentsVerastem, Inc.(A development stage company)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)13. Quarterly Financial Information (unaudited, in thousands, except per share data) (Continued) The Company was incorporated on August 4, 2010; however, it did not commence operations until the fourth quarter of 2010. Activity incurredduring the period from August 4, 2010 (inception) to September 30, 2010 is limited to organizational costs which were expensed when incurred.14. Subsequent events The Company reviews all activity subsequent to year end but prior to the issuance of the consolidated financial statements for events that couldrequire disclosure or that could impact the carrying value of assets or liabilities as of the balance sheet date. All significant subsequent events have beenproperly disclosed in the consolidated financial statements.F-28Table of ContentsEXHIBIT INDEX Exhibitnumber Description of exhibit 3.1 Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to AnnualReport on Form 10-K (File No. 001-35403) filed by the Registrant on March 30, 2012) 3.2 Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.4 to AmendmentNo. 3 to the Registration Statement on Form S-1 (File No. 333-177677) filed by the Registrant onJanuary 13, 2012) 4.1 Second Amended and Restated Investors' Rights Agreement, dated November 1, 2011, by and among theRegistrant and the other parties thereto (incorporated by reference to Exhibit 4.2 to the RegistrationStatement on Form S-1 (File No. 333-177677) filed by the Registrant on November 3, 2011) 4.2 Registration Rights Agreement, dated July 11, 2012, by and between the Registrant and Pfizer Inc.(incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K (File No. 001-35403) filed bythe Registrant on July 11, 2012) 4.3 Specimen certificate evidencing shares of common stock (incorporated by reference to Exhibit 4.1 toAmendment No. 3 to the Registration Statement on Form S-1 (File No. 333-177677) filed by theRegistrant on January 13, 2012) 10.1#2010 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registration Statement onForm S-1 (File No. 333-177677) filed by the Registrant on November 3, 2011) 10.2#2012 Incentive Plan (incorporated by reference to Exhibit 10.2 to Amendment No. 3 to the RegistrationStatement on Form S-1 (File No. 333-177677) filed by the Registrant on January 13, 2012) 10.3#Form of Incentive Stock Option Agreement under 2012 Incentive Plan (incorporated by reference toExhibit 10.3 to Amendment No. 3 to the Registration Statement on Form S-1 (File No. 333-177677) filedby the Registrant on January 13, 2012) 10.4#Form of Nonqualified Stock Option Agreement under 2012 Incentive Plan (incorporated by reference toExhibit 10.4 to Amendment No. 3 to the Registration Statement on Form S-1 (File No. 333-177677) filedby the Registrant on January 13, 2012) 10.5#Form of Restricted Stock Unit Agreement under 2012 Incentive Plan (incorporated by reference toExhibit 10.16 to Amendment No. 3 to the Registration Statement on Form S-1 (File No. 333-177677)filed by the Registrant on January 13, 2012) 10.6#Amended and Restated Employment Agreement between the Registrant and Robert Forrester(incorporated by reference to Exhibit 10.5 to Amendment No. 3 to the Registration Statement on Form S-1 (File No. 333-177677) filed by the Registrant on January 13, 2012) 10.7#Amended and Restated Employment Agreement between the Registrant and Jonathan Pachter(incorporated by reference to Exhibit 10.6 to Amendment No. 3 to the Registration Statement on Form S-1 (File No. 333-177677) filed by the Registrant on January 13, 2012) 10.8#Form of Indemnification Agreement between the Registrant and each director (incorporated by referenceto Exhibit 10.7 to Amendment No. 1 to the Registration Statement on Form S-1 (File No. 333-177677)filed by the Registrant on December 7, 2011) 10.9 Lease Agreement, dated May 2, 2011, between the Registrant and ARE-MA Region No. 38, LLC(incorporated by reference to Exhibit 10.8 to the Registration Statement on Form S-1 (File No. 333-177677) filed by the Registrant on November 3, 2011) Table of ContentsExhibitnumber Description of exhibit 10.10†Amended and Restated Exclusive Patent License Agreement and Tangible Property Agreement, datedJanuary 11, 2012, by and among the Registrant and the Whitehead Institute for Biomedical Research(incorporated by reference to Exhibit 10.9 to Amendment No. 3 to the Registration Statement on Form S-1 (File No. 333-177677) filed by the Registrant on January 13, 2012) 10.11†Exclusive Patent License Agreement, dated December 16, 2011, by and among the Registrant and theWhitehead Institute for Biomedical Research (incorporated by reference to Exhibit 10.10 to AmendmentNo. 2 to the Registration Statement on Form S-1 (File No. 333-177677) filed by the Registrant onDecember 22, 2011) 10.12 License Agreement, dated November 17, 2011, between the Registrant and Poniard Pharmaceuticals, Inc.(incorporated by reference to Exhibit 10.15 to Amendment No. 2 to the Registration Statement onForm S-1 (File No. 333-177677) filed by the Registrant on December 22, 2011) 10.13†Letter Agreement, dated October 1, 2010, between the Registrant and the Broad Institute (incorporated byreference to Exhibit 10.11 to the Registration Statement on Form S-1 (File No. 333-177677) filed by theRegistrant on November 3, 2011) 10.14#Letter Agreement, dated August 20, 2010, between the Registrant and Eric Lander, Ph.D. (incorporatedby reference to Exhibit 10.13 to the Registration Statement on Form S-1 (File No. 333-177677) filed bythe Registrant on November 3, 2011) 10.15#Letter Agreement, dated July 30, 2010, as amended October 18, 2010, between the Registrant and RobertWeinberg, Ph.D. (incorporated by reference to Exhibit 10.14 to the Registration Statement on Form S-1(File No. 333-177677) filed by the Registrant on November 3, 2011) 10.16#Restricted Stock Purchase Agreement, dated August 11, 2010, between the Registrant and ChristophWestphal (incorporated by reference to Exhibit 10.17 to Annual Report on Form 10-K (File No. 001-35403) filed by the Registrant on March 30, 2012) 10.17#Restricted Stock Purchase Agreement, dated August 11, 2010, between the Registrant and RichardAldrich (incorporated by reference to Exhibit 10.18 to Annual Report on Form 10-K (File No. 001-35403) filed by the Registrant on March 30, 2012) 10.18*#Employment Agreement, dated March 1, 2012, between the Registrant and Daniel Paterson 10.19†Asset Purchase Agreement, dated May 10, 2012, by and between the Registrant and S*Rio Pte Ltd.(incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q (File No. 001-35403) filedby the Registrant on August 13, 2012) 10.20†License Agreement, dated July 11, 2012, by and between the Registrant and Pfizer Inc. (incorporated byreference to Exhibit 10.2 to Quarterly Report on Form 10-Q (File No. 001-35403) filed by the Registranton August 13, 2012) 10.21#Offer Letter, dated as of September 18, 2012, by and between the Registrant and Christoph Westphal,M.D., Ph.D. (incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q (File No. 001-35403) filed by the Registrant on November 11, 2013) 10.22#Restricted Stock Unit Agreement, dated as of September 18, 2012, by and between the Registrant andChristoph Westphal, M.D., Ph.D. (incorporated by reference to Exhibit 10.2 to Quarterly Report onForm 10-Q (File No. 001-35403) filed by the Registrant on November 11, 2013) 10.23#Restricted Stock Unit Agreement, dated as of September 18, 2012, by and between the Registrant and 10.23#Restricted Stock Unit Agreement, dated as of September 18, 2012, by and between the Registrant andChristoph Westphal, M.D., Ph.D. (incorporated by reference to Exhibit 10.3 to Quarterly Report onForm 10-Q (File No. 001-35403) filed by the Registrant on November 11, 2013) Table of ContentsExhibitnumber Description of exhibit 10.24#Employment Agreement, dated as of October 23, 2012, by and between the Registrant and JoannaHorobin (incorporated by reference to Exhibit 10.4 to Quarterly Report on Form 10-Q (File No. 001-35403) filed by the Registrant on November 11, 2013) 10.25*#Amendment to Form of Restricted Stock Unit Agreement under 2012 IncentivePlan 21.1*Subsidiaries of the Registrant 23.1*Consent of Ernst & Young LLP 31.1*Certification of the Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) 31.2*Certification of the Chief Operating Officer pursuant to Exchange Act Rule 13a-14(a) 32.1*Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002. 32.2*Certification of the Chief Operating Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002. 101.INS††XBRL Instance Document 101.SCH††XBRL Taxonomy Extension Schema Document 101.CAL††XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF††XBRL Taxonomy Extension Definition Linkbase Document 101.LAB††XBRL Taxonomy Extension Label Linkbase Document††Submitted electronically herewith. *Filed herewith. †Confidential treatment granted as to portions of the exhibit. Confidential materials omitted and filed separately with the Securitiesand Exchange Commission. #Management contract or compensatory plan, contract or agreement.Exhibit 10.18 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the “Agreement”), dated March 1, 2012, is by and between Verastem, Inc. (the “Company”), a Delawarecorporation with its principal place of business at 215 First Street, Suite 440, Cambridge, MA 02142, and Dan Paterson (the “Executive”) of 7 Cedar HillDrive, Westwood, MA 02090. WHEREAS, the Executive has certain experience and expertise that qualify him to provide management direction and leadership for the Company. WHEREAS, the Company wishes to employ the Executive to serve as its Vice President, Head of Corporate Development and Diagnostics. NOW, THEREFORE, in consideration of the mutual covenants and promises contained herein and other good and valuable consideration, the receiptand sufficiency of which are hereby acknowledged, the Company offers and the Executive accepts employment upon the following terms and conditions: 1. Position and Duties. Upon the terms and subject to the conditions set forth in this Agreement, the Company hereby offers and theExecutive hereby accepts employment with the Company to serve as its Head of Business Development/ Diagnostics, reporting initially to the Company’sChief Executive Officer. The Executive agrees to perform the duties of the Executive’s position and such other duties as reasonably may be assigned to theExecutive from time to time. The Executive also agrees that while employed by the Company, the Executive will devote one hundred percent (100%) of theExecutive’s business time and the Executive’s reasonable commercial efforts, business judgment, skill and knowledge exclusively to the advancement of thebusiness and interests of the Company and to the discharge of the Executive’s duties and responsibilities for it. 2. Compensation and Benefits. During the Executive’s employment, as compensation for all services performed by the Executive for theCompany and subject to his performance of his duties and responsibilities for the Company, pursuant to this Agreement or otherwise, the Company willprovide the Executive the following pay and benefits: (a) Base Salary; Annual Bonus. Effective upon the closing of the Company’s initial public offering of its Common Stock onFebruary 1, 2012 (the “2012 IPO”), the Company will pay the Executive a base salary at the rate of Three Hundred Thousand Dollars ($300,000) per year. Such amount shall be payable in accordance with the regular payroll practices of the Company for its executives, as in effect from time to time, and subject toincrease from time to time by the Board in its discretion. The Executive shall have the opportunity to earn an annual target bonus measured againstperformance criteria to be determined by the Board (or a committee thereof) of 35% of the Executive’s then current annual base salary. Any bonus amountpayable by the Company, if any, shall be paid no later than March 15 of the year following the year in which such bonus is earned. (b) RSUs. Upon the closing of the 2012 IPO, the Company granted to the Executive a restricted stock unit award (the “IPO RSU”)representing the right to receive 114,285 shares of Company Common Stock (after giving effect to a 1 for 3.5 reverse stock split of the Company’s Common Stock effected on January 10, 2012) and subject to appropriate adjustment to reflect any stock dividend, stock split, combinationor other similar recapitalization with respect to the Company’s Common Stock) upon satisfaction of applicable vesting conditions, as set forth in the RSUAgreement between the Company and the Executive. (c) Participation in Employee Benefit Plans. The Executive will be entitled to participate in all Employee Benefit Plans from timeto time in effect for employees of the Company generally, except to the extent such plans are duplicative of benefits otherwise provided the Executive under thisAgreement (e.g., severance pay) or under any other agreement. The Executive’s participation will be subject to the terms of the applicable plan documents andgenerally applicable Company policies. The Company may alter, modify, add to or delete its Employee Benefit Plans at any time as it, in its sole judgment,determines to be appropriate, without recourse by the Executive. For purposes of this Agreement, “Employee Benefit Plan” shall have the meaning ascribed tosuch term in Section 3(3) of ERISA, as amended from time to time. (d) Vacation. The Executive will accrue three weeks paid vacation per year (or such greater amount as is generally made available tothe Company’s executive officers) in accordance with the Company’s policies from time to time in effect and receive paid holidays in accordance with theCompany holiday schedule. Vacation may be taken at such times and intervals as the Executive shall determine, subject to the business needs of theCompany, and otherwise shall be subject to the policies of the Company, as in effect from time to time. (e) Business Expenses. The Company will pay or reimburse the Executive for all reasonable business expenses incurred or paid bythe Executive in the performance of his duties and responsibilities for the Company, subject to any maximum annual limit and other restrictions on suchexpenses set by the Company and to such reasonable substantiation and documentation as it may specify from time to time. Any such reimbursement thatwould constitute nonqualified deferred compensation subject to Section 409A shall be subject to the following additional rules: (i) no reimbursement of anysuch expense shall affect the Executive’s right to reimbursement of any other such expense in any other taxable year; (ii) reimbursement of the expense shall bemade, if at all, not later than the end of the calendar year following the calendar year in which the expense was incurred; and (iii) the right to reimbursementshall not be subject to liquidation or exchange for any other benefit. 3. Confidential Information, Non-Competition and Proprietary Information. The Executive has executed or will execute theCompany’s standard Employee Non-Solicitation, Non-Competition, Confidential Information and Inventions Assignment Agreement. It is understood andagreed that breach by the Executive of the Employee Non-Solicitation, Non-Competition, Confidential Information and Inventions Assignment Agreement shallconstitute a material breach of this Agreement. 4. Termination of Employment. The Executive’s employment under this Agreement shall continue until terminated pursuant to thisSection 4. (a) The Company may terminate the Executive’s employment for “Cause” upon written notice to the Executive received at least fivebusiness days prior to such termination 2 setting forth in reasonable detail the nature of the Cause. The following, as determined by the Board in good faith and using its reasonable judgment, shallconstitute Cause for termination: (i) the Executive’s willful failure to perform, or gross negligence in the performance of, the Executive’s material duties andresponsibilities to the Company and its Affiliates which is not remedied within thirty (30) days of written notice thereof; (ii) material breach by the Executive ofany material provision of this Agreement or any other agreement with the Company or any of its Affiliates which is not remedied within thirty (30) days ofwritten notice thereof; (iii) fraud, embezzlement or other dishonesty with respect to the Company and any of its Affiliates, taken as a whole, which, in the caseof such other dishonesty, causes or could reasonably be expected to cause material harm to the Company and any of its Affiliates, taken as a whole; or (iv) theExecutive’s conviction of a felony. (b) The Company may terminate the Executive’s employment at any time other than for Cause upon one month’s written notice to theExecutive. (c) The Executive may terminate his employment hereunder for Good Reason by providing notice to the Company of the conditiongiving rise to the Good Reason no later than thirty (30) days following the occurrence of the condition, by giving the Company thirty (30) days to remedy thecondition and by terminating employment for Good Reason within thirty (30) days thereafter if the Company fails to remedy the condition. For purposes ofthis Agreement, “Good Reason” shall mean, without the Executive’s consent, the occurrence of anyone or more of the following events: (i) material diminutionin the nature or scope of the Executive’s responsibilities, duties or authority, provided that in the absence of a Change of Control neither (x) the Company’sfailure to continue the Executive’s appointment or election as a director or officer of any of its Affiliates nor (y) any diminution in the nature or scope of theExecutive’s responsibilities, duties or authority that is reasonably related to a diminution of the business of the Company or any of its Affiliates shallconstitute “Good Reason”; (ii) a material reduction in the Executive’s base salary other than one temporary reduction of not more than 120 days and not inexcess of 20% of the Executive’s base salary in connection with and in proportion to a general reduction of the base salaries of the Company’s executiveofficers; (iii) failure of the Company to provide the Executive the salary or benefits in accordance with Section 2 hereof after thirty (30) days’ notice duringwhich the Company does not cure such failure; or (iv) relocation of the Executive’s office more than forty (40) miles from the location of the Company’sprincipal offices as of the date of Employee’s hire. (d) The Executive may terminate his employment with the Company other than for Good Reason at any time upon one month’s noticeto the Company. (e) This Agreement shall automatically terminate in the event of the Executive’s death during employment. The Company mayterminate the Executive’s employment, upon notice to the Executive, in the event the Executive becomes disabled during employment and, as a result, is unableto continue to perform substantially all of his material duties and responsibilities under this Agreement for one-hundred and fifty (150) days during any periodof three hundred and sixty-five (365) consecutive calendar days. If any question shall arise as to whether the Executive is disabled to the extent that theExecutive is unable to perform substantially all of his material duties and responsibilities for the Company and its Affiliates, the Executive shall, at theCompany’s request and expense, submit to a medical examination by a 3 physician selected by the Company to whom the Executive or the Executive’s guardian, if any, has no reasonable objection to determine whether the Executiveis so disabled and such determination shall for the purposes of this Agreement be conclusive of the issue. If such a question arises and the Executive fails tosubmit to the requested medical examination, the Company’s determination of the issue shall be binding on the Executive. 5. Severance Payments and Other Matters Related to Termination. (a) Termination pursuant to Section 4(b) or 4(c). i. Except as provided in Section 5(c) below, in the event of termination of the Executive’s employment either by theCompany other than for Cause pursuant to Section 4(a) of this Agreement or by the Executive for Good Reason pursuant to Section 4(c) of this Agreement, (I)all unvested options, restricted stock, and restricted stock units (including the IPO RSUs) in each case that were granted prior to the 2012 IPO and which, bytheir terms, vest only based on the passage of time (disregarding any acceleration of the vesting of such options, restricted stock or restricted stock units basedon individual or Company performance) shall vest as of the date of termination (notwithstanding anything to the contrary in Section 2(b) of this Agreement)with respect to an additional nine (9) months of vesting; and (II) the Company shall pay the Executive’s then-current annual base salary for a period of nine(9) months in accordance with the Company’s payroll practice then in effect, beginning on the Payment Commencement Date. ii. If the Executive is participating in the Company’s group health plan and/or dental plan at the time the Executive’semployment terminates, and the Executive exercises his right to continue participation in those plans under the federal law known as COBRA, or anysuccessor law, the Company will pay or, at its option, reimburse the Executive, for the full premium cost of that participation for nine (9) months followingthe date on which the Executive’s employment with the Company terminates or, if earlier, until the date the Executive becomes eligible to enroll in the health (or,if applicable, dental) plan of a new employer, payable in accordance with regular payroll practices for benefits beginning on the Payment CommencementDate. The Company will also pay the Executive on the date of termination any base salary earned but not paid through the, date of termination and pay forany vacation time accrued but not used to that date. In addition, the Company will pay the Executive any bonus which has been awarded to the Executive, butnot yet paid on the date of termination of his employment, payable in a lump sum on the Payment Commencement Date. iii. Any obligation of the Company to provide the Executive severance payments or other benefits under this Section 5(a) isconditioned on the Executive’s signing an effective and reasonable release of claims in the form provided by the Company (the “Employee Release”) within 60days following the termination of the Executive’s employment, which release shall not apply to (i) claims for indemnification in the Executive’s capacity as anofficer or director of the Company under the Company’s Certificate of Incorporation, By-laws or agreement, if any, providing for director or officerindemnification, (ii) rights to receive insurance coverage and payments under any policy maintained by the Company and (iii) rights to receive retirementbenefits that are accrued and fully vested at the time of the Executive’s termination and rights under such plans protected by ERISA. Any severance paymentsto be 4 made in the form of salary continuation pursuant to the terms of this Agreement shall be payable in accordance with the normal payroll practices of theCompany, and will begin at the Company’s next regular payroll period following the effective date of the Employee Release, but shall be retroactive to the dateof termination. The Executive agrees to provide the Company prompt notice of the Executive’s eligibility to participate in the health plan and, if applicable,dental plan of any employer. The Executive further agrees to repay any overpayment of health benefit premiums made by the Company hereunder. (b) Termination other than pursuant to Section 4(b) or 4(c). In the event of any termination of the Executive’s employment, otherthan a termination by the Company pursuant to Section 4(b) of this Agreement or a termination by the Executive for Good Reason pursuant to Section 4(c) ofthis Agreement, the Company will pay the Executive any base salary earned but not paid through the date of termination and pay for any vacation timeaccrued but not used to that date. In addition, the Company will pay the Executive any bonus which has been awarded to the Executive, but not yet paid onthe date of termination of the Executive’s employment. The Company shall have no other payment obligations to the Executive under this Agreement. (c) Upon a Change of Control. i. If, within ninety (90) days prior to the Change of Control or within eighteen (18) months following a Change of Control(as defined in Section 6 hereof), the Company or any successor thereto terminates the Executive’s employment other than for Cause, or the Executiveterminates his employment for Good Reason, then, in lieu of any payments to the Executive or on the Executive’s behalf under Section 5(a) hereof, (i) all of theExecutive’s then remaining unvested options, restricted stock and restricted stock units which, by their terms, vest only based on the passage of time(disregarding any acceleration of the vesting of such options, restricted stock or restricted stock units based on individual or Company performance) shallautomatically vest as of the date of termination (notwithstanding anything to the contrary in Section 2(b) of this Agreement) and (ii) the Company shall pay,within thirty (30) days of such termination, a lump sum payment equal to the Executive’s then-current annual base salary for a period of twelve (12) months;provided, however, that if such termination occurs prior to a Change of Control, such severance payments shall be made at the time and in the manner setforth in Section 5(a)(i) during the period beginning on the date of termination through the date of the Change of Control with any severance remaining to bepaid under this Section 5(c)(i) payable in a lump sum on the closing date of the Change of Control; and, ii. If the Executive is participating in the Company’s group health plan and/or dental plan at the time the Executive’semployment terminates (whether such termination is as described in (i) above), and the Executive exercises his right to continue participation in those plansunder the federal law known as COBRA, or any successor law, the Company will pay or, at its option, reimburse the Executive, for the full premium cost ofthat participation for twelve (12) following the date on which the Executive’s employment with the Company terminates or, if earlier, until the date theExecutive becomes eligible to enroll in the health (or, if applicable, dental) plan of a new employer, with such amount payable on a pro-rata basis inaccordance with the Company’s regular payroll practices for benefits. The Company will also pay the Executive on the date of termination any base salaryearned but not paid 5 through the, date of termination and pay for any vacation time accrued but not used to that date. In addition, the Company will pay the Executive any bonuswhich has been awarded to the Executive, but not yet paid on the date of termination of his employment, payable within 30 days of the date of termination. (d) Except for any right the Executive may have under applicable law to continue participation in the Company’s group health anddental plans under COBRA, or any successor law, benefits shall terminate in accordance with the terms of the applicable benefit plans based on the date oftermination of the Executive’s employment, without regard to any continuation of base salary or other payment to the Executive following termination. (e) Provisions of this Agreement shall survive any termination if so provided in this Agreement or if necessary or desirable toaccomplish the purposes of other surviving provisions, including without limitation the Executive’s obligations under Section 3 of this Agreement and underthe Employee Non-Solicitation, Non- Competition, Confidential Information and Inventions Assignment Agreement. The obligation of the Company to makepayments to the Executive or on the Executive’s behalf under Section 5 of this Agreement is expressly conditioned upon the Executive’s continued fullperformance of the Executive’s obligations under Section 3 hereof, under the Employee Non-Solicitation, Non-Competition, Confidential Information andInventions Assignment Agreement to be executed herewith, and under any subsequent agreement between the Executive and the Company or any of its Affiliatesrelating to confidentiality, non-competition, proprietary information or the like; provided however that any future agreement that Executive is asked to executedoes not impose any greater restrictions or obligations upon Executive or upon his post-termination activities than the agreements signed at the outset of hisemployment with the Company. 6. Definitions. For purposes of this agreement; the following definitions apply: “Affiliates” means all persons and entities directly or indirectly controlling, controlled by or under common control with the Company, where controlmay be by management authority, equity interest or otherwise. “Change of Control” shall mean (i) the acquisition of beneficial ownership (as defined in Rule 13d-3 under the Exchange Act) directly or indirectly byany “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), of securities of the Company representing a majority or more of thecombined voting power of the Company’s then outstanding securities, other than an acquisition of securities for investment purposes pursuant to a bona fidefinancing of the Company; (ii) a merger or consolidation of the Company with any other corporation in which the holders of the voting securities of theCompany prior to the merger or consolidation do not own more than 50% of the total voting securities of the surviving corporation; or (iii) the sale ordisposition by the Company of all or substantially all of the Company’s assets other than a sale or disposition of assets to an Affiliate of the Company or aholder of securities of the Company; notwithstanding the foregoing, no transaction or series of transactions shall constitute a Change of Control unless suchtransaction or series of transactions constitutes a “change in control event” within the meaning of Treasury Regulation Section 1.409A-3(i)(5)(i). 6 “Person” means an individual, a corporation, an association, a partnership, an estate, a trust and any other entity or organization, other than theCompany or any of its Affiliates. 7. Conflicting Agreements. The Executive hereby represents and warrants that his signing of this Agreement and the performance of hisobligations under it will not breach or be in conflict with any other agreement to which the Executive is a party or is bound and that the Executive is not nowsubject to any covenants against competition or similar covenants or any court order that could affect the performance of the Executive’s obligations under thisAgreement. The Executive agrees that he will not disclose to or use on behalf of the Company any proprietary information of a third party without that party’sconsent. 8. Withholding; Other Tax Matters. Anything to the contrary notwithstanding, (a) all payments required to be made by the Companyhereunder to Executive shall be subject to the withholding of such amounts, if any, relating to tax and other payroll deductions as the Company mayreasonably determine it should withhold pursuant to any applicable law or regulation, and (b) all severance payments and benefits payable pursuant toSections 5(a) and 5(c) hereof shall be subject to the terms and conditions set forth on Exhibit A attached hereto. 9. Assignment. Neither the Executive nor the Company may make any assignment of this Agreement or any interest in it, by operation oflaw or otherwise, without the prior written consent of the other; provided, however, that the Company may assign its rights and obligations under thisAgreement without the Executive’s consent to one of its Affiliates or to any Person with whom the Company shall hereafter affect a reorganization, consolidatewith, or merge into or to whom it transfers all or substantially all of its properties or assets. This Agreement shall inure to the benefit of and be binding uponthe Executive and the Company, and each of our respective successors, executors, administrators, heirs and permitted assigns. 10. Severability. If any portion or provision of this Agreement shall to any extent be declared illegal or unenforceable by a court of competentjurisdiction, then the remainder of this Agreement, or the application of such portion or provision in circumstances other than those as to which it is sodeclared illegal or unenforceable, shall not be affected thereby, and each portion and provision of this Agreement shall be valid and enforceable to the fullestextent permitted by law. 11. Miscellaneous. This Agreement, together with the Employee Non-Solicitation, Non-Competition, Confidential Information and InventionsAssignment Agreement, sets forth the entire agreement between the Executive and the Company and replaces all prior communications, agreements andunderstandings, written or oral, with respect to the terms and conditions of the Executive’s employment. This Agreement may not be modified or amended,and no breach shall be deemed to be waived, unless agreed to in writing by the Executive and an expressly authorized representative of the Board. Theheadings and captions in this Agreement are for convenience only and in no way define or describe the scope or content of any provision of this Agreement. This Agreement may be executed in two or more counterparts, each of which shall be an original and all of which together shall constitute one and the sameinstrument. This is a Massachusetts contract and shall be governed and construed in accordance with the laws of the Commonwealth of Massachusetts,without regard to the conflict-of-laws principles thereof. 7 12. Notices. Any notices provided for in this Agreement shall be in writing and shall be effective when delivered in person, consigned to areputable national courier service for overnight delivery or deposited in the United States mail, postage prepaid, and addressed to the Executive at theExecutive’s last known address on the books of the Company or, in the case of the Company, to it by notice to the Chairman of the Board of Directors, c/oVerastem, Inc. at its principal place of business, or to such other addressees) as either party may specify by notice to the other actually received. [Remainder of page intentionally left blank.] 8 IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument by the Company, by its duly authorized representative, and bythe Executive, as of the date first stated above. THE EXECUTIVETHE COMPANY /s/ Dan Paterson/s/ Robert ForresterDan PatersonRobert ForresterChief Operating Officer 9 Exhibit A Payments Subject to Section 409A 1. Subject to this Exhibit A, any severance payments that may be due under the Agreement shall begin only upon the date of the Executive’s“separation from service” (determined as set forth below) which occurs on or after the termination of Executive’s employment. The following rules shall applywith respect to distribution of the severance payments, if any, to be provided to Executive under the Agreement, as applicable: (a) It is intended that each installment of the severance payments under the Agreement provided under shall be treated as a separate “payment”for purposes of Section 409A. Neither the Company nor Executive shall have the right to accelerate or defer the delivery of any such payments exceptto the extent specifically permitted or required by Section 409A. (b) If, as of the date of Executive’s “separation from service” from the Company, Executive is not a “specified Executive” (within the meaningof Section 409A), then each installment of the severance payments shall be made on the dates and terms set forth in the Agreement. (c) If, as of the date of Executive’s “separation from service” from the Company, Executive is a “specified Executive” (within the meaning ofSection 409A), then: (i) Each installment of the severance payments due under the Agreement that, in accordance with the dates and terms set forthherein, will in all circumstances, regardless of when Executive’s separation from service occurs, be paid within the short-term deferralperiod (as defined under Section 409A) shall be treated as a short-term deferral within the meaning of Treasury Regulation Section 1.409A-1(b)(4) to the maximum extent permissible under Section 409A and shall be paid on the dates and terms set forth in the Agreement; and (ii) Each installment of the severance payments due under the Agreement that is not described in this Exhibit A, Section 1(c)(i) andthat would, absent this subsection, be paid within the six-month period following Executive’s “separation from service” from the Companyshall not be paid until the date that is six months and one day after such separation from service (or, if earlier, Executive’s death), with anysuch installments that are required to be delayed being accumulated during the six-month period and paid in a lump sum on the date that issix months and one day following Executive’s separation from service and any subsequent installments, if any, being paid in accordancewith the dates and terms set forth herein; provided, however, that the preceding provisions of this sentence shall not apply to anyinstallment of payments if and to the maximum extent that that such installment is deemed to be paid under a separation pay plan that doesnot provide for a deferral of compensation by reason of the application of Treasury Regulation 1.409A-1(b)(9)(iii) (relating to separation payupon an involuntary 10 separation from service). Any installments that qualify for the exception under Treasury Regulation Section 1.409A-1(b)(9)(iii) must bepaid no later than the last day of Executive’s second taxable year following the taxable year in which the separation from service occurs. 2. The determination of whether and when Executive’s separation from service from the Company has occurred shall be made and in a mannerconsistent with, and based on the presumptions set forth in, Treasury Regulation Section 1.409A-1(h). Solely for purposes of this Exhibit A, Section 2,“Company” shall include all persons with whom the Company would be considered a single employer under Section 414(b) and 414(c) of the Code. 3. The Company makes no representation or warranty and shall have no liability to Executive or to any other person if any of the provisions of theAgreement (including this Exhibit) are determined to constitute deferred compensation subject to Section 409A but that do not satisfy an exemption from, or theconditions of, that section. 11Exhibit 10.25 AMENDMENT TO THE VERASTEM, INC.FORM OF RESTRICTED STOCK UNIT AGREEMENTGRANTED UNDER 2012 INCENTIVE PLAN WHEREAS, Verastem, Inc. sponsors and maintains the Verastem Inc. 2012 Incentive Plan (the “Plan”); and WHEREAS, Verastem, Inc. filed with the Securities Exchange Commission a form of Restricted Stock Unit Agreement (the “Form of Award”) onJanuary 13, 2012; and WHEREAS, Verastem, Inc. wishes to amend the Form of Award to permit greater flexibility in determining the rate of withholding for federal incometax; NOW, THEREFORE, Verastem Inc., pursuant to its authority under Section 10(f) of the Plan, hereby amends Section 4(b) of the Form of Award toread as set forth below. As a condition to the granting of the RSUs and the vesting thereof, the Participant acknowledges and agrees that he is responsible for the payment ofincome and employment taxes (and any other taxes required to be withheld) payable in connection with the grant or vesting of, or otherwise inconnection with, the RSUs. Accordingly, the Participant agrees to remit to the Company or any applicable subsidiary an amount sufficient to paysuch taxes. Such payment shall be made to the Company or the applicable subsidiary of the Company in a form that is reasonably acceptable to theCompany, as the Company may determine in its discretion. The Company in its discretion may permit such payment to be made by “netsettlement” through which the Company retains and withholds from delivery at the time of vesting that number of shares of Common Stock having afair market value equal to the sum of (i), (ii), and (iii), each calculated with respect to the vesting RSUs, where (i) is the statutory minimumwithholding taxes under state and local laws owed by the Participant, (ii) is any taxes on employees imposed by Chapter 21 of the U.S. InternalRevenue Code of 1986, as amended and (iii) is either (a) the mandatory flat withholding rate, if the value of the shares delivered under the vestingRSUs, when added to all supplemental wage payments previously made by the Company to the Participant during the calendar year, exceeds $1million or (b) if Section 4(b)(iii)(a) does not apply, by agreement of the Company and the Participant, either (I) the optional flat withholding rate onsupplemental wages or (II) the amount of tax to be withheld as if the aggregate of the supplemental wages and any regular wages constituted a singlewage payment for the regular wage period, taking into consideration the Form W-4 submitted by the Participant. Alternatively, the Company mayrequire the Participant to provide a designated broker with irrevocable instructions directing the designated broker to, on the date of the designatedbroker’s receipt of any shares of Common Stock in accordance with Section 2, sell in accordance with ordinary principles of best execution thatnumber of such shares of Common Stock as is necessary to yield net proceeds to the Participant equal to the amount of withholding taxes withrespect to the income recognized by the Participant as a result of the vesting of the RSUs (based on the minimum statutory withholding rates for alltax purposes, including payroll and social taxes, that are applicable to such income) and remit such proceeds to the Company in satisfaction of such tax withholding obligations ofthe Company. IN WITNESS WHEREOF, Verastem, Inc. has caused this instrument to be executed by its duly authorized officer this day of , 2013. VERASTEM, INC. By: Its: Exhibit 21.1 List of Registrant’s Subsidiaries Verastem Securities Company, incorporated in Massachusetts, a wholly owned subsidiary. QuickLinks -- Click here to rapidly navigate through this documentExhibit 23.1 Consent of Independent Registered Public Accounting Firm We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 333-180475 and Form S-3 No. 333-186393) ofVerastem, Inc. and in the related Prospectus of our report dated March 26, 2013, with respect to the consolidated financial statements of Verastem, Inc.,included in this Annual Report (Form 10-K) for the year ended December 31, 2012./s/ Ernst & Young LLPBoston, MassachusettsMarch 26, 2013QuickLinksExhibit 23.1Consent of Independent Registered Public Accounting FirmQuickLinks -- Click here to rapidly navigate through this documentExhibit 31.1 CERTIFICATIONS I, Christoph Westphal, M.D., Ph.D. certify that: 1. I have reviewed this Annual Report on Form 10-K of Verastem, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respectsthe financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as definedin Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by otherswithin those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed underour supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's mostrecent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting,to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant'sinternal control over financial reporting.Date: March 26, 2013 /s/ CHRISTOPH WESTPHALChristoph Westphal, M.D., Ph.D.Chief Executive OfficerQuickLinksExhibit 31.1CERTIFICATIONSQuickLinks -- Click here to rapidly navigate through this documentExhibit 31.2 CERTIFICATIONS I, Robert Forrester, certify that: 1. I have reviewed this Annual Report on Form 10-K of Verastem, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respectsthe financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as definedin Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by otherswithin those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed underour supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's mostrecent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting,to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant'sinternal control over financial reporting.Date: March 26, 2013 /s/ ROBERT FORRESTERRobert ForresterPresident and Chief Operating Officer (Principal financialofficer)QuickLinksExhibit 31.2CERTIFICATIONSQuickLinks -- Click here to rapidly navigate through this documentExhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K of Verastem, Inc. (the "Company") for the period ended December 31, 2012 as filed with theSecurities and Exchange Commission (the "SEC") on the date hereof (the "Report"), the undersigned, Christoph Westphal, M.D., Ph.D., ChiefExecutive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Actof 2002, that to my knowledge: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as amended; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany.Date: March 26, 2013 A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company andfurnished to the SEC or its staff upon request. /s/ CHRISTOPH WESTPHALChristoph Westphal, M.D., Ph.D.Chief Executive OfficerQuickLinksExhibit 32.1CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEYACT OF 2002QuickLinks -- Click here to rapidly navigate through this documentExhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K of Verastem, Inc. (the "Company") for the period ended December 31, 2012 as filed with theSecurities and Exchange Commission (the "SEC") on the date hereof (the "Report"), the undersigned, Robert Forrester, President and Chief OperatingOfficer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,that to my knowledge: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as amended; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany.Date: March 26, 2013 A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company andfurnished to the SEC or its staff upon request. /s/ ROBERT FORRESTERRobert ForresterPresident and Chief Operating Officer (Principal financialofficer)QuickLinksExhibit 32.2CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEYACT OF 2002

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